Business solutions is expected to pay its first annual dividend of $.84 per share in year 3. starting in year 6, the company plans to increase the dividend by 2 percent per year. what is the value of this stock today, year 0, at a required return of 14.4 percent?

Ans. the value of the stock today is $6.31

Explanation:

Hi, we need to bring to present value all the cash flows of this stock, that is bringing to present value the cash flows from year 1 through 6 and the horizon value which is the value in year 6 of the cash flows from 6 and beyond.

The formula to use for the dividends from year 1 - 6 is:

Where:

r = is the discount rate

n = number of consecutive dividends

And the present value of the horizon value is:

So everything together is:

Now, the numbers

So based on the future cash flows of this share, its fair price is $6.31

Best of luck.