Question

Pfender Guitars has a current annual cash dividend policy of $4.00. The price of the stock is set to yield a return of 11​%. What is the price of this stock if the dividend will be paid:

A. 10 years and then the company repurchases the stock for $35

B. 15 years and then the company repurchases the stock for $35

C. 40 years and then the company repurchases the stock for $35

D. years and then the company repurchases the stock for $35

E. years and then the company repurchases the stock for $35

F. Forever with no repurchase

Answer 1

Price of Stock= PV of Stock + PVA of Dividend payments

PV of stock = Repurchase price / [(1+ i )^n] where i = 0.11

PVA of Dividend = where r =0.11

A. n=10 years

PV of stock = 35/(1+0.11)^10 = 13.4940

PVA of dividend = = 24.5782

Price of Stock = PV of Stock + PVA of Dividend payments

Price of Stock = 13.494+24.5782 = 38.07

B. n=40 years

PV of stock = 35/(1+0.11)^15 = 8.3787

PVA of dividend = = 30.4243

Price of Stock = PV of Stock + PVA of Dividend payments

Price of Stock = 8.3787 + 30.4243 = 38.789

C. n=20years

PV of stock = 35/(1+0.11)^40 = 0.7733

PVA of dividend = = 39.1162

Price of Stock = PV of Stock + PVA of Dividend payments

Price of Stock = 0.7733 +39.1162 = 39.89

N is missing in part D and E. "The calculation remains the same."

F. The is no repurchase

Price of stock = Dividend / i

Price of stock = 4/0.1 = $40