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Fey Fashions expects the following dividend pattern over the next seven​ years: Year 1 Year 2...

Fey Fashions expects the following dividend pattern over the next seven​ years: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 ​$1.20 ​$1.30 ​$1.40 ​$1.51 ​$1.63 ​$1.76 ​$1.90 The company will then have a constant dividend of ​$2.10 forever. What is the​ stock's price today if an investor wants to earn a.   14​%? b.   20​%?

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Answer #1

a)

Present value year 7 = Annual payment / required return

Present value year 7 = 2.1 / 0.14

Present value year 7 = 15

Stock price = 1.20 / (1 + 0.14)1 + 1.30 / (1 + 0.14)2 + 1.40 / (1 + 0.14)3 + 1.51 / (1 + 0.14)4 + 1.63 / (1 + 0.14)5 + 1.76 / (1 + 0.14)6 + 1.90 / (1 + 0.14)7 + 15 / (1 + 0.14)7

Stock price = 1.052632 + 1.000308 + 0.94496 + 0.894041 + 0.846571 + 0.801832 + 0.759311 + 5.99456

Stock price = $12.29

b)

Present value year 7 = Annual payment / required return

Present value year 7 = 2.1 / 0.2

Present value year 7 = 10.5

Stock price = 1.20 / (1 + 0.2)1 + 1.30 / (1 + 0.2)2 + 1.40 / (1 + 0.2)3 + 1.51 / (1 + 0.2)4 + 1.63 / (1 + 0.2)5 + 1.76 / (1 + 0.2)6 + 1.90 / (1 + 0.2)7 + 10.5 / (1 + 0.2)7

Stock price = 1 + 0.902778 + 0.810185 + 0.728202 + 0.65506 + 0.58942 + 0.530255 + 2.930357

Stock price = $8.15

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