Hot Wings, Inc., has an odd dividend policy. The company has just paid a dividend of $10.25 per...

Question:

Hot Wings, Inc., has an odd dividend policy. The company has just paid a dividend of $10.25 per share and has announced that it will increase the dividend by $8.25 per share for each of the next four years, and then never pay another dividend.

If you require a return of 12 percent on the company's stock, how much will you pay for a share today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Dividend Growth Model

The dividend growth model can be used to find the intrinsic value of a stock that pays regular dividends. The model assumes that the current stock price reflects the present value of all future dividend inflow for investors.

Answer and Explanation:

.

Given -

  • Dividend (Do) = $10.25

Since dividend will increase by $8.25 for each of the next 4 Years, the dividends are as follows -

  • Year 1 Dividend...

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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