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NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.41 a share. The following dividends will be $.46, $.61, and $.91 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 11 percent

Respuesta :

Answer:

$9.51

Explanation:

The computation of the price willing to pay for purchasing one share is shown below:

But before that following calculation need to be done

Value after year 4 is

= (D4 × Growth rate) ÷ (Required return - Growth rate)

= ($0.91 × 1.03) ÷ (0.11 - 0.03)

= $11.71625

Now the current price is

= Expecte dividends × Present value of discounting factor(11%,time period)

= $0.41 ÷ 1.11 + $0.46 ÷ 1.11^2 + $0.61 ÷ 1.11^3 + $0.91 ÷ 1.11^4 + $11.71625 ÷ 1.11^4

= $9.51