Bond\'s Bait and Tackle, from problem 1, is expected to pay the following divide
ID: 2658472 • Letter: B
Question
Bond's Bait and Tackle, from problem 1, is expected to pay the following dividends over the next four years: $2.50, $1.25, $1.00, and $0.75. Beginning in year 5, Bond's expects to maintain a constant 5 percent growth rate in dividends forever. It the required rate of return on the stock is 10 percent, what is the current share price? Bond's Bait and Tackle, from problem 1, is expected to pay the following dividends over the next four years: $2.50, $1.25, $1.00, and $0.75. Beginning in year 5, Bond's expects to maintain a constant 5 percent growth rate in dividends forever. It the required rate of return on the stock is 10 percent, what is the current share price?Explanation / Answer
Present value at year 4 = D1 / required rate - growth rate
Present value at year 4 = ( 0.75 * 1.05) / 0.10 - 0.05
Present value at year 4 = 0.7875 / 0.05
Present value at year 4 = 15.75
Present value today = 15.75 / ( 1 + 0.1)4
Present value today = 10.7575
Present value of year 4 dividend = 0.75 / ( 1 + 0.1)4 = 0.51226
Present value of year 3 dividend = 1 / ( 1 + 0.1)3 = 0.7513
Present value of year 2 dividend = 1.25 / ( 1 + 0.1)2 = 1.0331
Present value of year 1 dividend = 2.5 / ( 1 + 0.1 ) = 2.2727
Current share price = 2.2727 + 1.0331 + 0.7513 + 0.51226 + 10.7575
Current share price = $15.3269