Question

Burkhardt Corp. pays a constant $15.25 dividend on its stock. The company will maintain this dividend for the next 9 years and will then cease paying dividends forever. If the required return on this stock is 9.2 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The price of any financial instrument is the PV of the future cash flows. The future dividends ofthis stock are an annuity for 9 years, so the price of the stock is the PV of the annuity, which will be:

Current share price = $15.25 / (1.092) + $15.25 / (1.092)² + $15.25 / (1.092)³ + $15.25 / (1.092)⁴ + $15.25 / (1.092)⁵ + $15.25 / (1.092)⁶ + $15.25 / (1.092)⁷ + $15.25 / (1.092)⁸ + $15.25 / (1.092)⁹

Current share price = $90.69