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Yesteryear Productions pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $0.40 a share for two years commencing four years from today. After that time, the company plans on paying a constant $0.75 a share annual dividend indefinitely. How much are you willing to pay to buy a share of this stock today if your required return is 11.6 percent?

a. $3.78
b. $4.22
c. $4.37
d. $4.71
e. $4.98

Respuesta :

Answer:

b. $4.22

Explanation:

The computation of the price that willing to pay is shown below:

But before that we need to do the following calculations

Terminal value at year 5 is

= 0.75 ÷ 0.116

= 6.46552

Now

Total cash flow is

= 6.46552 + .40

= 6.86552

And finally

Present value =(PVF at 11.6%,4 ×  D4 ) + (PVF at 11.6%,5 × CF5)

= (0.64468 × 0.40) + (0.57767 × 6.86552)

= 0.2579+ 3.9660

= $4.22

Hence, the correct option is b.

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