A prestigious investment bank is expected to initiate its quarterly dividend of $1 five years from...

A prestigious investment bank is expected to initiate its quarterly dividend of $1 five years from today and the dividend it expected to remain constant permanently. What is the price of the banks stock if the stated annual interest rate is 12% compounded quarterly?

Expert Solution

Quarterly Dividend = $1.00

Annual Interest Rate = 12.00% compounded quarterly
Quarterly Interest Rate = 12.00% / 4
Quarterly Interest Rate = 3.00%

First dividend will be paid in 5 years

Present Value = $1.00/1.03^21 + $1.00/1.03^22 + …
Present Value = $1.00 * (1/1.03)^20 * (1/0.03)
Present Value = $1.00 * 18.46
Present Value = $18.46

Therefore, price of the banks stock is $18.46

jeff jeffy answered 2 years ago

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