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
1.5	1.62	1.75	1.89	2.04	2.2	2.38

. The company will then have a constant dividend of​$2.60 forever. What is the​ stock's price today if an investor wants to earn

a.  

16​%?

b.  

23%?

Answer 1

If Required Ret is 16%:

Price of Stcok = PV of CFs from it.

P7 = D8 / Ke

= $ 2.60 / 16%

= $ 16.25

Price of stock Today:

Year	CF	PVF @16%	Disc CF
1	$      1.50	0.8621	$      1.29
2	$      1.62	0.7432	$      1.20
3	$      1.75	0.6407	$      1.12
4	$      1.89	0.5523	$      1.04
5	$      2.04	0.4761	$      0.97
6	$      2.20	0.4104	$      0.90
7	$      2.38	0.3538	$      0.84
7	$   16.25	0.3538	$      5.75
Price of Stock			$   13.13

If Required Ret is 23%:

Price of Stcok = PV of CFs from it.

P7 = D8 / Ke

= $ 2.60 / 23%

= $ 11.30

Price of stock Today:

Year	CF	PVF @16%	Disc CF
1	$      1.50	0.8130	$      1.22
2	$      1.62	0.6610	$      1.07
3	$      1.75	0.5374	$      0.94
4	$      1.89	0.4369	$      0.83
5	$      2.04	0.3552	$      0.72
6	$      2.20	0.2888	$      0.64
7	$      2.38	0.2348	$      0.56
7	$   11.30	0.2348	$      2.65
Price of Stock			$      8.63