Question

Hailey Corporation pays a constant $13.80 dividend on its stock. The company will maintain this dividend for the next 7 years and will then cease paying dividends forever. If the required return on this stock is 9 percent, what is the current share price? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

Answer 1

The current share price of Hailey Corporation is calculated by discounting the constant dividend of $13.80 for 7 years at a required return of 9 percent, using the present value of an annuity formula.

Step-by-step explanation:

The question asks for the calculation of the current share price of Hailey Corporation, which pays a constant $13.80 dividend for the next 7 years and then stops paying dividends entirely. Given that the required return on this stock is 9 percent, to find the current price, we will discount each of the dividend payments back to the present value at the required rate of return. The formula to calculate the present value of an annuity (which in this case, is the constant dividend payments) is PVA = C * [(1 - (1 + r)^-t) / r], where PVA is the present value of annuity, C is the cash flow per period, r is the interest rate, and t is the number of periods. Applying this to Hailey Corporation's dividends, we get:

PVA = 13.80 * [(1 - (1 + 0.09)^-7) / 0.09]

Calculating this results in a current share price, a critical decision factor when investing in such stocks.

Answer 2

The current share price of Hailey Corporation is approximately $69.46, based on the constant dividends of $13.80 for the next 7 years with a required return of 9%.

Step-by-step explanation:

The current share price for Hailey Corporation, which pays a constant $13.80 dividend over the next 7 years before ceasing dividend payments, can be calculated using the present value of an annuity formula:

P = D × [(1 - (1 + r)^(-t)) / r]

Where:

• P represents the present value of the stock (current share price)
• D represents the annual dividend
• r represents the required rate of return
• t represents the number of years the dividend is paid

Plugging in the given values:

P = $13.80 × [(1 - (1 + 0.09)^(-7)) / 0.09]

After calculating, we find that:

P = $13.80 × [(1 - (1 + 0.09)^(-7)) / 0.09] = $13.80 × [5.0332] ≈ $69.46

So, the current share price is approximately $69.46.