Question

Burkhardt Corp. pays a constant $14.70 dividend on its stock. The company will maintain this dividend for the next 10 years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share price

Answer 1

Answer: $86.57

Step-by-step explanation:

The current share of price can be computed as:

Share price(Present value of annuity )=
`C* [(1-(1+i)^(-n))/(i)]`, where C =each annuity payment, i= interest rate, n = number of periods.

Present value of annuity =
`14.70* [(1-(1+0.11)^(-10))/(0.11)]`

`=14.70* [(1-(1.11)^(-10))/(0.11)]\\\\=14.70* [(1-0.3522)/(0.11)]\\\\=14.70* [(1-0.3522)/(0.11)]\\\\=14.70* [(0.6478)/(0.11)]\\\\=14.70* (5.889)=\$86.57`

Hence, the current share price= $86.57