Question

kL airlines paid an annual dividend of 1.42 a share last month. the company is planning on paying 1.50, 1,75 and 1.80 a share over the next three years, respectively .after that, the dividend will constant at 2.00 a share per year. what is the market price of this stock if the market rate of return is 10.5 percent.

Answer 1

PRICE = Dividend/Rate of return p_s=dollor 2/0 middot 105=dollor 19 middot 05 p_0=31 middot 50/(1+0.105)+$1 middot 75/(1+0 middot 105)^2+$1 middot 80+$19 middot 05/(1+0 middot 105)^3 $18 middot 24 = current market price. First as all we calculated the price at 3rd year i.e., at constant dividend rate. Then we calculated price considering next 3 years dividend and constant dividend there after at 10 middot 5% rate of return market price is $ 18 middot 24.