Question

Singing Fish Fine Foods has a current annual cash dividend policy of ​$3.50. The price of the stock is set to yield a return of 12 %. What is the price of this stock if the dividend will be paid a.  for 10 ​years? b.  for 16 ​years? c.  for 42 ​years? d.  for 50 ​years? e.  for 100 ​years? f.  ​forever?

Answer 1

Answer a.

Annual Dividend = $3.50
Interest Rate = 12%
Period = 10 years

Stock Price = $3.50/1.12 + $3.50/1.12^2 + … + $3.50/1.12^10
Stock Price = $3.50 * (1 - (1/1.12)^10) / 0.12
Stock Price = $3.50 * 5.65022
Stock Price = $19.78

Answer b.

Annual Dividend = $3.50
Interest Rate = 12%
Period = 16 years

Stock Price = $3.50/1.12 + $3.50/1.12^2 + … + $3.50/1.12^16
Stock Price = $3.50 * (1 - (1/1.12)^16) / 0.12
Stock Price = $3.50 * 6.97399
Stock Price = $24.41

Answer c.

Annual Dividend = $3.50
Interest Rate = 12%
Period = 42 years

Stock Price = $3.50/1.12 + $3.50/1.12^2 + … + $3.50/1.12^42
Stock Price = $3.50 * (1 - (1/1.12)^42) / 0.12
Stock Price = $3.50 * 8.26194
Stock Price = $28.92

Answer d.

Annual Dividend = $3.50
Interest Rate = 12%
Period = 50 years

Stock Price = $3.50/1.12 + $3.50/1.12^2 + … + $3.50/1.12^50
Stock Price = $3.50 * (1 - (1/1.12)^50) / 0.12
Stock Price = $3.50 * 8.30450
Stock Price = $29.07

Answer e.

Annual Dividend = $3.50
Interest Rate = 12%
Period = 100 years

Stock Price = $3.50/1.12 + $3.50/1.12^2 + … + $3.50/1.12^100
Stock Price = $3.50 * (1 - (1/1.12)^100) / 0.12
Stock Price = $3.50 * 8.33323
Stock Price = $29.17

Answer f.

Annual Dividend = $3.50
Interest Rate = 12%

Stock Price = $3.50/1.12 + $3.50/1.12^2 + …
Stock Price = $3.50 / 0.12
Stock Price = $29.17