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28 August, 03:11

6. The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17% rate of return

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  1. 28 August, 03:32
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    Price per share = $2.38

    Explanation:

    Using the dividend discount model, we can calculate the fair price per share of the stock.

    The formula for price is,

    P = D1 / 1+r + D2 / (1+r) ^2 + ... and so on

    Where,

    D1 is dividend next year from today r is the required rate of return

    Thus, Price for such a stock is,

    P = 1.2 / (1+0.17) + 1 / (1+0.17) ^2 + 1 / (1+0.17) ^3 = > $2.3805
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