Question

13.

Stoneworks, Inc., has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $5 per share for each of the next five years, and then never pay another dividend. If you require a return of 12 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.)

Answer 1

Price of a stock is the present value of all future cash flows receivable from the stock discounted at required rate or return

Present Value factor

= 1 / (1 + r) ^ n

Where,

r = Rate of return = 12% or 0.12

n = Years = 1 to 5

So, PV Factor for year 2 will be

= 1 / (1.12^2)

= 1 / 1.2544

= 0.797194

The following table shows the calculations

Calculations	A	B	C = A x B
Year	Cash Flow	PV Factor	Present Value
1	11	0.892857	9.82
2	16	0.797194	12.76
3	21	0.71178	14.95
4	26	0.635518	16.52
5	31	0.567427	17.59
		Price	71.64

So, the price of the stock today is $71.64