General Importers announced that it will pay a dividend of $4.30 per share one year from today. After that, the company expects a slowdown in its business and will not pay a dividend for the next 6 years. Then, 8 years from today, the company will begin paying an annual dividend of $2.40 forever. The required return is 12.7 percent. What is the price of the stock today?

Question

Business

Heidy Webster

18 October, 10:23

General Importers announced that it will pay a dividend of $4.30 per share one year from today. After that, the company expects a slowdown in its business and will not pay a dividend for the next 6 years. Then, 8 years from today, the company will begin paying an annual dividend of $2.40 forever. The required return is 12.7 percent. What is the price of the stock today?

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Brielle Boyd · Answer 1

The price of the stock today is $11.59

Explanation:

As Gordon Growth Model, price of stock = expected dividend paid / (discounting rate - growth rate)

Growth rate of dividend from year 1 to year 8 (after 7 years)

= ($2.4/$4.3) ^ (1/7) - 1 = - 8%

Price of stock = $2.4 / (12.7% - (-8%) = $11.59