Announced today that it will begin paying annual dividends next year. The first dividend will be $0.10 a share. The following dividends will be $0.15, $0.20, $0.50, and $0.60 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 5 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 9.5 percent

The maximum that should be paid for the stock today is $9.99

Explanation:

The price of the stock today can be calculated using the dividend discount model or DDM which values a stock based on the present value of the expected future dividends of the stock. The price of the stock today is,

P0 = 0.10 / (1+0.095)  +  0.15 / (1+0.095)^2  +  0.20 / (1+0.095)^3  +  

0.50 / (1+0.095)^4  +  0.60 / (1+0.095)^5  +  [ (0.60 * (1+0.05) / (0.095 - 0.05)) / (1+0.095)^5 ]

P0 = $9.99

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