Question

Maloney, Inc, has an odd policy. The company has just paid a dividend of $3.50 per share and has announced that it will increase the dividend by $4.50 per share for each of the next 5 years, and then never pay another dividend. If you require a return of 11 percent on the company's stock, how much will you pay for a share today?

Answer 1

Since this is case of arithmetic growth in dividend, so its price will be
Discounted present value divdend at 11%
	Year	Cash Flow	DF at 11%	Present Value
		A	B	C = A x B
	1	8	0.900901	$                 7.21
	2	12.5	0.811622	$               10.15
	3	17	0.731191	$               12.43
	4	21.5	0.658731	$               14.16
	5	26	0.593451	$               15.43
		Price Today		$               59.38