Renew It,Inc.,is preparing to pay its first dividend.It is going to pay $0.45,$0.60,and $1 a share over the next three years,respectively.After that,the company has stated that the annual dividend will be $1.25 per share indefinitely.What is this stock worth to you per share if you demand a 10.8 percent rate of return on stocks of this type?
A)$6.67
B)$8.21
C)$10.14
D)$11.47
E)$12.03

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can find the present value of the stock as follows:

PV = (0.45/(1+0.108)^1) + (0.60/(1+0.108)^2) + (1/(1+0.108)^3) + [(1.25/(0.108-0.03))/(1+0.108)^3]
PV = 0.394 + 0.467 + 0.793 + 10.491
PV = 11.145

Therefore, the stock is worth $11.145 per share to an investor demanding a 10.8% rate of return. The closest option is C) $10.14, which is the best choice.