Hot Wings, Inc., has an odd dividend policy. The company has just paid a dividend of $8.50 per share and has announced that it will increase the dividend by $6.50 per share for each of the next four years, and then never pay another dividend. Required: If you require a return of 16 percent on the company's stock, how much will you pay for a share today

The correct answer is $65.90 (approx.)

Explanation:

According to the scenario, computation of the given data are as follows:

Dividend paid = $8.50

Increase dividend = $6.50 per year

Require return = 16%

We can calculate the current share price by using following method:

=[ ($8.5 + $6.5) : (1 + 16%) ^1] + [ ($8.5 + $6.5 + $6.5) : (1 + 16%) ^2] + [ ($8.5 + $6.5 + $6.5 + $6.5) : (1+16%) ^3] + [ ($8.5 + $6.5 + $6.5 + $6.5 + $6.5) : (1+16%) ^4

= $15 : 1.16 + $21.5 : 1.16^2 + 28 : 1.16^3 + 34.5 : 1.16^4

= $65.90 (approx.)