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Fey Fashions expects the following dividend pattern over the next seven​ years. The company will then...

Fey Fashions expects the following dividend pattern over the next seven​ years. The company will then have a constant dividend of ​$2.30 forever. What is the​ stock's price today if an investor wants to earn (table)

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

​$1.20

​$1.31

​$1.43

​$1.56

​$1.70

​$1.85

​$2.02

a)  What is the​ stock's price today if an investor wants to earn 14%

b)  What is the​ stock's price today if an investor wants to earn 22%

Solutions

Expert Solution

If Required Ret is 14%:

Price of Stcok = PV of CFs from it.

P7 = D8 / Ke

= $ 2.30 / 14%

= $ 16.43

Price of stock Today:

Year CF PVF @14% Disc CF
               1 $      1.20       0.8772 $      1.05
2 $      1.31       0.7695 $      1.01
3 $      1.43       0.6750 $      0.97
4 $      1.56       0.5921 $      0.92
5 $      1.70       0.5194 $      0.88
6 $      1.85       0.4556 $      0.84
7 $      2.02       0.3996 $      0.81
7 $   16.43       0.3996 $      6.57
Price of Stock $   13.05

If Required Ret is 22%:

Price of Stcok = PV of CFs from it.

P7 = D8 / Ke

= $ 2.30 / 22%

= $ 10.45

Price of stock Today:

Year CF PVF @22% Disc CF
               1 $      1.20       0.8197 $      0.98
2 $      1.31       0.6719 $      0.88
3 $      1.43       0.5507 $      0.79
4 $      1.56       0.4514 $      0.70
5 $      1.70       0.3700 $      0.63
6 $      1.85       0.3033 $      0.56
7 $      2.02       0.2486 $      0.50
7 $   10.45       0.2486 $      2.60
Price of Stock $      7.65

Pls comment, if any further assistance is required.

jeff jeffy answered 11 months ago
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