A company plans to pay an annual dividend of $1.30 starting next year for 6 more years and then discontinue all dividends. The dividend is expected to grow at 2.5 percent per year. If you require a return of 11 percent on the stock, what is the most you should be willing to pay?

Question

Quizplus · Accepted Answer

The present value of the dividends can be calculated using the formula for the present value of a growing annuity. The dividends grow at 2.5% per year, and the required return is 11%. Calculating the present value of these dividends gives approximately $5.81.

A Company Plans to Pay an Annual Dividend of $1