Question

# Stoneworks, Inc., has an odd dividend policy. The company has just paid a dividend of \$5...

Stoneworks, Inc., has an odd dividend policy. The company has just paid a dividend of \$5 per share and has announced that it will increase the dividend by \$4 per share for each of the next five years, and then never pay another dividend. If you require a return of 10 percent on the company’s stock, how much will you pay for a share today?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

The price is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)1 + Dividend in year 2 / (1 + required rate of return)2 + Dividend in year 3 / (1 + required rate of return)3 + Dividend in year 4 / (1 + required rate of return)4 + Dividend in year 5 / (1 + required rate of return)5

= \$ 9 / 1.10 + \$ 13 / 1.102 + \$ 17 / 1.103 + \$ 21 / 1.104 + \$ 25 / 1.105

= \$ 61.56 Approximately

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