Question

Question is attached.

Miles Hardware has an annual cash dividend policy that raises the dividend each year by 12%. Last year's dividend, Divo, was $1.60 per share. Investors want a return of 18% on this stock. What is the stock's price if a. the company will be in business for 10 years and not have b. the company will be in business for 15 years and not have a liquidating dividend? c. the company will be in business for 30 years and not have a liquidating dividend? d. the company will be in business for 45 years and not have a liquidating dividend? e. the company will be in business for 85 years ond not have a liquidating dividend? f. the company will be in business forever? liquidating dividend? a

Answer 1

a. Value of stock = Discounted present value of all future cash flow

So, if the company will in business for the next 10 year, then discounted present value= 1.6*(1.12/1.18)+1.6*(1.12/1.18)^2+1.6*(1.12/1.18)^3+...up to 10th year

= 1.6*0.9491*(1-0.9491^10)/(1-0.9491)=$12.13 per share

b. Similary, Price of of stock when the company is in business for next 15 years= 1.6*0.9491*(1-0.9491^15)/(1-0.9491)

=$16.20 per share

c.

Price of of stock when the company is in business for next 30 years= 1.6*0.9491*(1-0.9491^30)/(1-0.9491)

=$23.61 per share

d.

Price of of stock when the company is in business for next 45 years= 1.6*0.9491*(1-0.9491^45)/(1-0.9491)

=$26.99 per share

e.

Price of of stock when the company is in business for next 85 years= 1.6*0.9491*(1-0.9491^85)/(1-0.9491)

=$29.48 per share

f. Price of stock when the company is in business forever= 1.6*0.9491/(1-0.9491)=$29.83 per share (As the sum of infinite GP series is S= a1/(1-r) where a1=is 1st term and r= common multiplier)