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October 24, 2014

October 24, 2014

Posted by **Kurt** on Sunday, June 28, 2009 at 8:23pm.

Nonconstant Dividends

Hetfield and Ulrich, Inc., has an odd dividend policy. The company has just paid a dividend of $12 per share and has announced that it will increase the dividend by $7 per share for each of the next 5 years, and then never pay another dividend. If you require a 14 percent return on the company's stock, you will pay $______ per share today?

- non-constant dividends -
**Ms. Sue**, Sunday, June 28, 2009 at 9:31pm19 + 26 + 33 + 40 + 47 = 165

165/5 = 33 average yearly dividend

0.14x = 33

x = 235.71

- non-constant dividends -
**Kurt**, Sunday, June 28, 2009 at 10:02pmMs. Sue, I put in the answer and it says it is wrong. I looked over your work and it looks right... im wondering if maybe multiply instead of divide or something, im trying different ways to alter the answer. thanks for the help.

- non-constant dividends -
**Kurt**, Sunday, June 28, 2009 at 11:14pmi figured it out... you have to ^1, ^2, ^3^4^5 for each of the years o the rate of return for each one! thanks

- non-constant dividends -
**MathMate**, Sunday, June 28, 2009 at 11:37pmLet's try's Ms Sue's suggestion:

If the dividends accumulate without interest, we have after 5 years,

sum of dividends

= 19 + 26 + 33 + 40 + 47

= 165

This amount should equal the purchase price, P, paid and compounded over 5 years. Thus:

P*1.14*5 = 165

P=$85.70

If the dividends also accumulate at 14% (unlikely?), then

future value of dividends

=19*1.14^4+26*1.14^3+33*1.14^2+40*1.14^1+47*1.14^0

=206.097187

P*1.14*5 = 206.097187

P=$107.04

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