Question

Singing Fish Fine Foods has a current annual cash dividend policy of $4.00

The price of the stock is set to yield a return of 12 %

What is the price of this stock if the dividend will be paid

a.  for 10 ​years?

b.  for 17 ​years?

c.  for 41 years?

d.  for 60 years?

e.  for 100 years?

f.  ​forever?

King Waterbeds has an annual cash dividend policy that raises the dividend each year by

5​%. The most recent​ dividend, Div 0 was $ 0.40 per share. What is the​ stock's price if

a.  an investor wants a return of 6​%?

b.  an investor wants a return of 9​%?

c.  an investor wants a return of 11​%?

d.  an investor wants a return of 14​%?

e.  an investor wants a return of 17​%?

Answer 1

Answer to Question 1:

Part a:

Dividend = $4.00
Required Return = 12%
Time Period = 10 years

Price of Stock = $4.00/1.12 + $4.00/1.12^2 + … + $4.00/1.12^9 + $4.00/1.12^10
Price of Stock = $4.00 * (1 - (1/1.12)^10) / 0.12
Price of Stock = $4.00 * 5.650223
Price of Stock = $22.60

Part b:

Dividend = $4.00
Required Return = 12%
Time Period = 17 years

Price of Stock = $4.00/1.12 + $4.00/1.12^2 + … + $4.00/1.12^16 + $4.00/1.12^17
Price of Stock = $4.00 * (1 - (1/1.12)^17) / 0.12
Price of Stock = $4.00 * 7.119630
Price of Stock = $28.48

Part c:

Dividend = $4.00
Required Return = 12%
Time Period = 41 years

Price of Stock = $4.00/1.12 + $4.00/1.12^2 + … + $4.00/1.12^40 + $4.00/1.12^41
Price of Stock = $4.00 * (1 - (1/1.12)^41) / 0.12
Price of Stock = $4.00 * 8.253372
Price of Stock = $33.01

Part d:

Dividend = $4.00
Required Return = 12%
Time Period = 60 years

Price of Stock = $4.00/1.12 + $4.00/1.12^2 + … + $4.00/1.12^59 + $4.00/1.12^60
Price of Stock = $4.00 * (1 - (1/1.12)^60) / 0.12
Price of Stock = $4.00 * 8.324049
Price of Stock = $33.30

Part e:

Dividend = $4.00
Required Return = 12%
Time Period = 100 years

Price of Stock = $4.00/1.12 + $4.00/1.12^2 + … + $4.00/1.12^99 + $4.00/1.12^100
Price of Stock = $4.00 * (1 - (1/1.12)^100) / 0.12
Price of Stock = $4.00 * 8.333234
Price of Stock = $33.33

Part f:

Dividend = $4.00
Required Return = 12%
Time Period = Forever

Price of Stock = $4.00/1.12 + $4.00/1.12^2 + …
Price of Stock = $4.00 / 0.12
Price of Stock = $33.33