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Nu-Tech is expecting a period of intense growth and has decided to reduce its annual dividend by 10 percent a year for the next two years. After that, it will maintain a constant dividend of $.70 a share. Last year, the company paid $1.80 per share. What is the value of this stock if the required rate of return is 13 percent?A. $7.62B. $6.99C. $6.79D. $8.87E. $8.22

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hoangkhangpham94

Answer:

The answer is C. That is, Value of the stock is $6.79.

Explanation:

Please find the below for detailed explanations and calculations:

We have the dividend stream given as below:

Y1 = 1.80 x 0.90 = $1.62;

Y2 = 1.62 x 0.90 = $1.458;

Constant dividend from Y3 of $0.70.

The value of this stock is equal to the total present value of the above expected dividend stream from the stock which is discounted at the required rate of return 13%:

=> Value of stock = (1.62/1.13) + (1.458/1.13^2) + [ ( 0.7/ 0.13) / 1.13^2] = $6.79.

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