Noshima Industries issued dividends totaling $0.60 last year. For the next two years, it expects dividends to increase by 50% annually and then remain constant thereafter. How much is one share of Noshima Industries stock worth today if you require a 9% rate of return?

Question

Quizplus · Accepted Answer

To find the stock price today, calculate the dividends for the next two years and the constant dividend thereafter. Year 1 dividend: $0.60 * 1.50 = $0.90. Year 2 dividend: $0.90 * 1.50 = $1.35. From Year 3 onwards, the dividend remains $1.35. The stock price is the present value of these dividends: PV = $0.90/(1.09) + $1.35/(1.09^2) + $1.35/(0.09 * 1.09^2) = $14.59.

Noshima Industries Issued Dividends Totaling $0