Question

Asonia Co. will pay a dividend of $5.60, $9.70, $12.55, and $14.30 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 10.6 percent on the company's stock, what is the stock price?

$38.15

$44.32

$33.64

$31.83

$36.23

Answer 1

Answer: The correct option is $31.83
To calculate the present value of the stock, we need to calculate the present value of the future dividends payments.
Given that, the company will pay a dividend of $5.60, $9.70, $12.55, and $14.30 per share for each of the next four years.
Present value is the summation of (dividend paid in year n)/(1+require return)^n)
=5.6/(1+10.6%)^1+9.7/(1+10.6%)^2+12.55/(1+10.6%)^3+14.3/(1+10.6%)^4  
=5.063291139+7.929786239+9.276376028+9.556866725
=31.82632013 or 31.83 (Rounded to two decimal places)
So, stock price=$31.83