Question

Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $1.20 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.8 percent, forever. The appropriate rate of return on the stock is 12 percent, compounded quarterly. What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

83.34

Step-by-step explanation:

The current market value of a share is the present value of future dividends in perpetuity, discounted at the cost of equity (i.e. the return required by the providers of equity capital).

Based on the above discussion the share price shall be calculated as:

Quarterly rate of return=12/4-=3%

Present value of next 12 quarter dividend=1.20((1-(1+3%)^-12)/3%))=11.94

Present value of all dividends after 12 quarters=(d(1+g)/ke-g)(1+ke)^-12=(1.20(1+1.8%)/3%-1.80%)(1+3%)^-12=71.40

Current market value of share=83.34

(11.94+71.40)