Question

I have no idea where to begin with this one !

Nonconstant Dividends

Hetfield and Ulrich, Inc., has an odd dividend policy. The company has just paid a dividend of $12 per share and has announced that it will increase the dividend by $7 per share for each of the next 5 years, and then never pay another dividend. If you require a 14 percent return on the company's stock, you will pay $______ per share today?

Answer 1

19 + 26 + 33 + 40 + 47 = 165

165/5 = 33 average yearly dividend

0.14x = 33

x = 235.71

Answer 2

Ms. Sue, I put in the answer and it says it is wrong. I looked over your work and it looks right... im wondering if maybe multiply instead of divide or something, im trying different ways to alter the answer. thanks for the help.

Answer 3

i figured it out... you have to ^1, ^2, ^3^4^5 for each of the years o the rate of return for each one! thanks

Answer 4

Let's try's Ms Sue's suggestion:

If the dividends accumulate without interest, we have after 5 years,
sum of dividends
= 19 + 26 + 33 + 40 + 47
= 165

This amount should equal the purchase price, P, paid and compounded over 5 years. Thus:
P*1.14*5 = 165
P=$85.70

If the dividends also accumulate at 14% (unlikely?), then
future value of dividends
=19*1.14^4+26*1.14^3+33*1.14^2+40*1.14^1+47*1.14^0
=206.097187

P*1.14*5 = 206.097187
P=$107.04