Question

General Importers announced that it will pay a dividend of $3.65 per share one year from today. After that, the company expects a slowdown in its business and will not pay a dividend for the next 4 years. Then, 6 years from today, the company will begin paying an annual dividend of $1.75 forever. The required return is 11.4 percent. What is the price of the stock today

Answer #1

**The price of the stock is computed as shown
below:**

**= Dividend in year 1 / (1 + required return) ^{1}
+ Dividend in year 2 / (1 + required return)^{2} + Dividend
in year 3 / (1 + required return)^{3} + Dividend in year 4
/ (1 + required return)^{4} + Dividend in year 5 / (1 +
required return)^{5} + 1 / (1 + required
return)^{5} ( Dividend in year 6 / required rate of return
) ]**

= $ 3.65 / 1.114 + $ 0 / 1.114^{2} + $ 0 /
1.114^{3} + $ 0 / 1.114^{4}
+ $ 0 / 1.114^{5} + 1 / 1.114^{5} [ ( $
1.75 / 0.114) ]

= $ 3.65 / 1.114 + $ 0 / 1.114^{2} + $ 0 /
1.114^{3} + $ 0 / 1.114^{4}
+ $ 0 / 1.114^{5} + $ 15.35087719 /
1.114^{5}

**= $ 12.22 Approximately**

Feel free to ask in case of any query relating to this question

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