New Corp.just paid a per share annual dividend of $1.50.The company is planning on paying $1.62,$1.68,$1.75,and $1.80 a share over the next four years,respectively.After that the dividend will be a constant $2.00 per share per year.What is the market price of this stock if the market rate of return is 15 percent?

Question

Quizplus · Accepted Answer

First, we need to find the present value of the future dividend payments:
PV = $1.62/(1+0.15)^1 + $1.68/(1+0.15)^2 + $1.75/(1+0.15)^3 + $1.80/(1+0.15)^4
PV = $1.42
Then, we can use the constant growth valuation model to find the market price of the stock:
P0 = D1/(r-g)
where D1 is the next year's dividend, r is the market rate of return, and g is the constant growth rate in dividends.
g = ($2.00 - $1.80)/$1.80 = 0.1111
P0 = $2.00/(0.15-0.1111) = $42.00
Finally, we add the present value of the future dividend payments to the market price of the stock:
Market price = $42.00 + $1.42 = $43.42
Therefore, the best choice is C).

New CorpJust Paid a Per Share Annual Dividend of $1