KL Airlines paid an annual dividend of $1.18 a share last month.The company is planning on paying $1.50,$1.75,and $1.80 a share over the next 3 years,respectively.After that,the dividend will be constant at $1.50 per share per year.What is the market price of this stock if the market rate of return is 10.5 percent?
A)$13.98
B)$14.07
C)$14.71
D)$17.16
E)$18.10

Question

Quizplus · Accepted Answer

Using the constant growth dividend valuation model:

PV = D1 / (r - g)

where PV is the present value of the stock, D1 is the next year's dividend, r is the required rate of return (or market rate of return), and g is the growth rate of dividends.

We can calculate the present value of the stock as follows:

PV = ($1.50 / (0.105 - 0.04)) + ($1.75 / (0.105 - 0.04)^2) + ($1.80 / (0.105 - 0.04)^3) + ($1.50 / (0.105 - 0.04)^4)

PV = $13.91

Next, we need to add the present value of the annual constant dividend to the present value of the future dividends:

PV = $13.91 + ($1.50 / 0.105)

PV = $14.71

Therefore, the market price of this stock is $14.71. Choice (C) is the correct answer.

KL Airlines Paid an Annual Dividend of $1