Question

Singing Fish Fine Foods has a current annual cash dividend policy of $2.00. The price of the stock is set to yield a return of 14%. What is the price of this stock if the dividend will be paid for:

A) 12 years?

B) 15 years?

C) 40 years?

D) 50 years?

E) 100 years?

F) Forever?

Answer 1

Solution:
A.	12 years	Price =$11.32
B.	15 years	Price =$12.28
C.	40 years	Price =$14.21
D.	50 years	Price =$14.27
E.	100 years	Price =$14.29
F.	Forever	Price =$14.29
Working Notes:
	Required rate of return r =14% = 0.14
	Current annual dividend (D0) = $2.00
	Finite constant dividend model will be used for A to E
	Price = Dividend × (1 – 1/(1+r)^n) / r
	n= finite period = no of years
A.	12 years
Notes:	Price = Dividend × (1 – 1/(1+r)^n) / r
	Price =2 × (1 – 1/(1+0.14)^12) / 0.14
	Price =11.32058425
	Price =$11.32
B.	15 years
Notes:	Price = Dividend × (1 – 1/(1+r)^n) / r
	Price =2 x (1 - 1/(1+0.14)^15) / 0.14
	Price =12.28433597
	Price =$12.28
C.	40 years
Notes:	Price = Dividend × (1 – 1/(1+r)^n) / r
	Price =2 x (1 - 1/(1+0.14)^40) / 0.14
	Price =14.21008188
	Price =$14.21
D.	50 years
Notes:	Price = Dividend × (1 – 1/(1+r)^n) / r
	Price =2 x (1 - 1/(1+0.14)^50) / 0.14
	Price =14.26531291
	Price =$14.27
E.	100 years
Notes:	Price = Dividend × (1 – 1/(1+r)^n) / r
	Price =2 x (1 - 1/(1+0.14)^100) / 0.14
	Price =14.2856852
	Price =$14.29
F.	Forever
	for forever case will use infinite constant dividend model
	Price = Dividend / r
	Price = $2/ 0.14
	Price =$14.28571429
	Price =$14.29
Please feel free to ask if anything about above solution in comment section of the question.