Question

Fey Fashions expects the following dividend pattern over the next seven​ years:

Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
​$1.101.10	​$1.191.19	​$1.291.29	​$1.391.39	​$1.501.50	​$1.621.62	​$1.751.75

The company will then have a constant dividend of $1.90 forever. What is the​ stock's price today if an investor wants to earn

a.16%

b.20%

Answer 1

Stock Price today is equal to the present value of all future dividends

If the investor wants to earn 16%

Stock Price = 1.10/(1.16) + 1.19/(1.16)^2 + 1.29/(1.16)^3 + 1.39/(1.16)^4 + 1.50/(1.16)^5 + 1.62/(1.16)^6 + 1.75/(1.16)^7 + 1.90/(0.16)(1.16)^7

= $9.61 (approx.)

b.If the investor wants to earn 20%, Price

= 1.10/(1.20) + 1.19/(1.20)^2 + 1.29/(1.20)^3 + 1.39/(1.20)^4 + 1.50/(1.20)^5 + 1.62/(1.20)^6 + 1.75/(1.20)^7 + 1.90/(0.20)(1.20)^7

= $7.44