Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at the level through year three, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?

Question

Quizplus · Accepted Answer

The correct answer is A because the current value per share is $25.51. The dividend yield is 12% / $2.40 = 5%. The dividend growth rate is 10% for the next two years and 2% thereafter. The current value of the stock is $2.40 / (0.12 - 0.05) = $25.51.

Atlas Home Supply Has Paid a Constant Annual Dividend of $2.40