Explore BrainMass

Explore BrainMass

    Payment for Purchase Price of Stock

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Yesteryear Productions pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $0.40 a share for two years commencing four years from today. After that time, the company plans on paying a constant $0.75 a share annual dividend indefinitely. How much are you willing to pay to buy a share of this stock today if your required return is 11.6 percent?

    How do I do this question?

    © BrainMass Inc. brainmass.com June 4, 2020, 4:00 am ad1c9bdddf

    Solution Preview

    Dear Student:

    This problem is asking you to compute the current price of a stock, which will be expected to pay dividends from year 4 forwards.

    The best way to start is figuring out a time line for the dividends, until the constant, indefinite dividend years begin. Then we calculate the present value (PV) of the dividends (years 4 and 5). Finally we compute the present value of the constant dividends, also called the terminal value or the horizon value.

    Year Div. PV of Div
    0 0
    1 0 0
    2 0 0
    3 0 0
    4 ...

    Solution Summary

    The payment purchases price of stocks are examined.