A stock will give an annuity of $100 for the next 10 years from year 1,...

A stock will give an annuity of $100 for the next 10 years from year 1, and then the annuity will be reduced by 5% each year from year 11 (into infinity). If the required rate of return is 8%, what is the price of the stock?

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Expert Solution

R = 8%

Annuity growth rate after 10 years (g) = -5%

Price of the stock = present value of annuity from year 1 to 10 + present value of annuity from year 11 to infinity

Price of the stock = 100*(1-1/(1+8%)^10)/.08 + (100*(1-5%)/(8%-(-5%))*(1/1.08^10)

Price of the stock = $1009.5

Rahul Sunny answered 2 years ago

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