Question

Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $1.55 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.5 percent, forever. The appropriate rate of return on the stock is 12 percent, compounded quarterly. What is the current stock price?

Answer 1

$88.99

Step-by-step explanation:

First, find the Present value of the dividends;

The quarterly constant dividend of 1.55 for the 12 quarters is in form of an annuity, therefore, you can find its PV using a financial calculator with the following inputs;

Recurring payment ;PMT = 1.55

Total quarters; N= 12

Quarterly interest rate; I/Y = 12%/4 = 3%

Future one time payment; FV = 0

Then compute Present value ; CPT PV = 15.429

Find PV of terminal cashflow of the constant growing dividend;

Div 13 = Div12 (1+g) = 1.55(1.015) = 1.5733

PV (Div13 onwards)
`=((1.5733)/(0.03-0.015) )/(1.03^(12) ) \\ \\ =(104.8867)/(1.4258) \\ \\ =73.5634`

Next, sum up the PVs to find the price of the stock;

= 15.429 + 73.5634

= $88.99