Maurer, inc.,has an odd dividend policy. The company has just paid a dividend of $2 per share and has announced that it will increase the dividend by $6 per share for each of the next five years, and then never pay another dividend. If yoy require a return of 10 percent on the company's stock, how much will you pay for a share today?

Price of stock = $44.05

Explanation:

The price of a share can be calculated using the dividend valuation model  

According to this model the value of share is equal to the sum of the present values of its future cash dividends discounted at the required rate of return.  

To determine the price of the stock to , we calculate the present value for each of the dividend payable for the next five years and then sum them.

The formula below would help

PV = G× (1+r)^(-n)

PV = Present Value, r  required rate of return - 10%, n- the year, G- dividend payable in a particular year

Year                             PV of dividend

1            2+6 ×× 1.1^-1  = 7.27

2           10 ×   1.1^-2 = 8.26

3           12× 1.1^-3    = 9.02

4           14 × 1.1^-4   =9.56

5          16 × 1.1^-5     = 9.93

Total Present Value of dividend = 7.27 + 8.26  +9.02  +9.56  +9.93  = 44.05

Price of stock = $44.05

Maurer, inc.,has an odd dividend policy. The company has just paid a dividend of $2 per share and has announced that it will increase the dividend by $6 per share for each of the next five years, and then never pay another dividend. If yoy require a return of 10 percent on the company's stock, how much will you pay for a share today?

Price of stock = $44.05

Explanation:

The price of a share can be calculated using the dividend valuation model  

According to this model the value of share is equal to the sum of the present values of its future cash dividends discounted at the required rate of return.  

To determine the price of the stock to , we calculate the present value for each of the dividend payable for the next five years and then sum them.

The formula below would help

PV = G× (1+r)^(-n)

PV = Present Value, r  required rate of return - 10%, n- the year, G- dividend payable in a particular year

Year                             PV of dividend

1            2+6 ×× 1.1^-1  = 7.27

2           10 ×   1.1^-2 = 8.26

3           12× 1.1^-3    = 9.02

4           14 × 1.1^-4   =9.56

5          16 × 1.1^-5     = 9.93

Total Present Value of dividend = 7.27 + 8.26  +9.02  +9.56  +9.93  = 44.05

Price of stock = $44.05

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