NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.59 a share. The following dividends will be $.64, $.79, and $1.09 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.9 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 13 percent?

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.59 a share. The following dividends will be $.64, $.79, and $1.09 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.9 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 13 percent?

Multiple Choice

·       

$13.04

Incorrect

·       

$12.45

·       

$2.47

·       

$9.87

Correct

·       

$12.93

Explanation

P₄ = ($1.09 × 1.039)/(.13 – .039) = $12.45

P₀ = $.59/1.13 + $.64/1.13² + $.79/1.13³ + $1.09/1.13⁴ + $12.45/1.13⁴ = $9.87