Question

Singing Fish Fine Foods has a current annual cash dividend policy of ​$3.75. 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 15 ​years?

c.  for 42 ​years?

d.  for 60 ​years?

e.  for 100 ​years?

f.  ​forever?

Answer 1

For part a to e, we need to compute the PV of annuity formed as a result of the constant dividends over finite periods.

PV =

a) n = 10

PV = $21.19

b) n = 15

PV = $25.54

c) n = 42

PV = $30.98

d) n = 60

PV = $31.22

e) n = 100

PV = $31.25

f) This is a case of perpetuity,

PV of perpetuity = Annual payment/Required Rate

PV = $3.75/12% = $31.25