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burnett corp. pays a constant $7.40 dividend on its stock. the company will maintain this dividend for the next 8 years and will then cease paying dividends forever. If the required return on this stock is 12 percent, what is the current share price

Respuesta :

Answer:

The correct answer is $36.778.

Explanation:

According to the scenario, the given data are as follows:

Dividend = $7.40

Time period (t) = 8 years

Return required (r) = 12%

So, we can calculate the current share price by using following formula:

Current share price = Dividend ×  Present value of annuity for 8 years

Where, Present value of Annuity for 8 years = = (1 - (1+r)^-t) ÷ r

= (1 - (1+12%)^-8) ÷ 12%)

= (( 1 - 0.40388322797) ÷ 0.12)

= $4.967639766916667 or $4.97

So, by putting the value, we get

Current share price = $7.40 × $4.97

= $36.778

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