If a stock will pay an initial dividend of $2 per share five years from today, and will increase it by 5% every year, what will the stock be worth today? Suppose that the cost of equity is 10%.
Added by Nicole G.
Step 1
The future value of the dividend in five years can be calculated using the formula for the future value of an annuity: \[ FV = P \times \left( \frac{(1 + r)^n - 1}{r} \right) \] Where: FV = Future value of the annuity P = Initial dividend payment = $2 r = Growth Show more…
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