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Hot Wings, Inc., has an odd dividend policy. The company has just paid a dividend of $8.75 per share and has announced that it will increase the dividend by $6.75 per share for each of the next four years, and then never pay another dividend. Required: If you require a return of 13 percent on the company’s stock, how much will you pay for a share today?

Respuesta :

jepessoa

Answer:

$70.18

Explanation:

in order to determine the current price of the stock we need to discount the future cash flows:

CF1 = $8.75 + $6.75 = $15.50

CF2 = $15.50 + $6.75 = $22.25

CF2 = $22.25 + $6.75 = $29

CF4 = $29 + $6.75 = $35.75

stock's price = $15.50/1.13 + $22.25/1.13² + $29/1.13³ + $35.75/1.13⁴ = $13.72 + $14.43 + $20.10 + $21.93 = $70.18

Since the company will not distribute any more dividends in the future, then your calculations must stop at year 4.

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