Question

8.) The required return on an investment is 10 percent. You estimate that firm X’s dividends will grow as follows:

                                                Year                            Dividend

                                                   1                                  $1.20

                                                   2                                    2.00

                                                   3                                    3.00

                                                   4                                    4.50

            For the subsequent years you expect the dividend to grow but at the modest rate of 4 percent annually. What is the maximum price that you should pay for this stock?

Answer 1

Hello Sir/ Mam

YOUR REQUIRED ANSWER IS $61.35

We know that:

Hence,

Time	Amount	PVF	PV
1	$1.20	0.909091	$1.09
2	$2.00	0.826446	$1.65
3	$3.00	0.751315	$2.25
4	$4.50	0.683013	$3.07
4	$78.00	0.683013	$53.28
			$61.35

I hope this solves your doubt.

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