Question

Calculate the following stock valuation problems:

Company X is paying an annual dividend of $1.35 and has decided to pay the same amount forever. How much should you pay for the stock, if you want to earn an annual rate of return of 9.5% on this investment?
You want to purchase common stock of Company X and hold it for 7 years. The company just announced they will be paying an annual cash dividend of $6.00 per share for the next 9 years. How much should you pay for the stock, if you will be able to sell the stock for $28 at the end of seven years and you want to earn an annual rate of return of 11% on this investment?

Answer 1

Question 1

Present Value of perpetuity = Dividend per period / rate of return

= 1.35/.095

= $14.21

Hence you should pay $14.21 for the stock.

Question 2

Preset worth of a share can be calculated as present value of future cash flows discounted at rate of return .

Year	Cashflow	PVF/PVAF@11%	Cashflow*PVF/PVAF
1-7	6	4.712	28.27
7	28	0.482	13.50

Present Value = ashflow*PVF/PVAF

= 28.27+13.50

= $41.77

*PVF= 1/(1+i)^n

**PVAF = (1-(1+r)^-n)/r