Question

Pfender Guitars has a current annual cash dividend policy of ​$6.00. 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 9 years and then the company repurchases the stock for ​$25​?

b.for 13 years and then the company repurchases the stock for ​$25​?  

c.for 40 years and then the company repurchases the stock for ​$25​?

d.for 60 years and then the company repurchases the stock for ​$25​?

e.for 100 years and then the company repurchases the stock for ​$25​?

f.forever with no repurchase of the​ stock?

a.What is the price of this stock if the dividend will be paid for 9 years and then the comapny repurchases the stock for $ 25​?

Answer 1

a) Price of Stock = PV of Dividends + PV of 25 = 6*((1-(1+12%)^-9)/12%) + 25/(1+12%)^9 = 40.98

b) Price of Stock = PV of Dividends + PV of 25 = 6*((1-(1+12%)^-13)/12%) + 25/(1+12%)^13 = 44.27

c) Price of Stock = PV of Dividends + PV of 25 = 6*((1-(1+12%)^-40)/12%) + 25/(1+12%)^40 = 49.73

d) Price of Stock = PV of Dividends + PV of 25 = 6*((1-(1+12%)^-60)/12%) + 25/(1+12%)^60 = 49.97

e) Price of Stock = PV of Dividends + PV of 25 = 6*((1-(1+12%)^-100)/12%) + 25/(1+12%)^100 = 50

f) Price of stock for perpetuity = 6/12% = 50

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