Galloway,Inc.has an odd dividend policy.The company has just paid a dividend of $7 per share and has announced that it will increase the dividend by $2 per share for each of the next 5 years,and then never pay another dividend.How much are you willing to pay per share today to buy this stock if you require a 15 percent return?

Question

Quizplus · Accepted Answer

To determine the price per share today, we need to find the present value of all future dividends.

First, let's calculate the future dividends:

- Year 1: $7 + $2 = $9 per share
- Year 2: $9 + $2 = $11 per share
- Year 3: $11 + $2 = $13 per share
- Year 4: $13 + $2 = $15 per share
- Year 5: $15 + $2 = $17 per share

Starting in year 6, no more dividends will be paid.

Next, we need to discount these future dividends back to the present using a 15% required return:

PV = $9/(1.15)^1 + $11/(1.15)^2 + $13/(1.15)^3 + $15/(1.15)^4 + $17/(1.15)^5

PV = $13.72

Therefore, if you require a 15% return on your investment, you would be willing to pay $13.72 per share today for this stock. Answer choice C is the closest option at $41.72 for three shares.