Question

Company A's stock is currently trading at $30 per share. The stock ' is expected to pay 2 dollars dividend in year 1, 3 dollars in year 2, X dollars dividend per year for ever after that. The required rate of return on the stock is 10% per year. What is the amount of the dividend X?

a) $2.54

b) $3.11

c) $1.50

d) $i.43

e) $1.58

Answer 1

Answer Correct Option is b) $ 3.11.

Calculation :

Current Stock Price = Present Value of Dividends

30 = {2 / [(1 + 0.10)^1]} + {3 / [(1 + 0.10)^2]} + {(X / 0.10)* [(1 + 0.10)^2]}

X is divided by 0.10 because it is given that it will increase to perpetuity.

30 = 1.81818181818 + 2.47933884297 + (10X * 0.82644628099)

30 - 1.81818181818 - 2.47933884297 = 8.2644628099X

8.2644628099X = 25.702479339

==> X = 25.702479339 / 8.2644628099

X = $3.11

Therefore $3.11 is the amount of Dividend X