KL Airlines paid an annual dividend of $1.42 a share last month. The company is planning on paying $1.50, $1.75, and $1.80 a share over the next 3 years, respectively. After that, the dividend will be constant at $2 per share per year. What is the market price of this stock if the market rate of return is 10.5 percent?

Question

Quizplus · Accepted Answer

The market price of the stock is calculated by finding the present value of the expected future dividends. The dividends for the first three years are $1.50, $1.75, and $1.80. From year 4 onwards, the dividend is constant at $2. The present value of these dividends is calculated using the formula for the present value of a growing perpetuity for the constant dividends and discounting the individual dividends for the first three years at the market rate of return of 10.5%. The correct calculation results in a market price of $18.24.

KL Airlines Paid an Annual Dividend of $1