Crosby Inc. has an 11% required rate of return. It will not pay any dividend until the end of year 20 at which time it will begin to pay an annual dividend of $4.00 per share which it will hold constant thereafter. What is an estimate of the price of Crosby's stock TODAY?

value of stock today = $5.01

Explanation:

given data

required rate = 11%

end of year =  20

annual dividend = $4.00

solution  

price of the stock at the end of 19th year is

price of the stock = D ÷ r    1

dividends are paid at the end of 20th year

we get price of the stock at the end of 19th year first

price of the stock =  $4 ÷ 0.11

price of the stock = $36.36

value of stock today = 36.36 × \frac{1}{(1+r)^t}    2

value of stock today = 36.36 × \frac{1}{(1+0.11)^{19}}

value of stock today = $5.01

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