Question

Queen B Corp. has a current annual cash dividend policy of $2.00. The price of the stock is set to yield 11% return. What is the price of this stock today if the dividend will be paid for 9 year and then a liquidating final dividend of $20.00?

Answer 1

The price of the stock will be $18.04

Step-by-step explanation:

The price of the stock will be the same as the present value of the future dividends including the liquidating final dividend of 20.00 discounted at 11%

present value of the dividends:

Present Value of Annuity

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 2

time 9

rate 0.11

`2 * (1-(1+0.11)^(-9) )/(0.11) = PV\\`

PV $11.0741

Then, PV of the liquidating dividend:

PRESENT VALUE OF LUMP SUM

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 20.00

time 10.00

rate 0.11

`(20)/((1 + 0.11)^(10) ) = PV`

PV 7.04

$11.07 + $7.04 = $ 18.04