Answer:
a. The price at which the stock would need to be priced today is approximately $2.86.
b. The price at which the stock would need to be priced today is approximately $14.29.
c. The price at which the stock would need to be priced today is approximately $22.86.
d. The price at which the stock would need to be priced today is approximately $41.43.
Step-by-step explanation:
Since the annual dividend is constant in all cases, the price at which the stock need to be priced today can be calculated using the following formula:
P = d / r ……………………………………… (1)
Where;
P = current price per share or price at which the stock would need to be priced today = ?
d = Constant annual dividend forever = To be given
r = required return = 7%, or 0.07
Using the formula above, we have:
a. $0.20 constant annual dividend forever
Substituting the values into equation (1), we have:
P = $0.20 / 0.07 = $2.85714285714286
Approximating to 2 decimal places, we have:
P = $2.86
Therefore, the price at which the stock would need to be priced today is approximately $1.82.
b. $1.00 constant annual dividend forever
Substituting the values into equation (1), we have:
P = $1.00 / 0.07 = $14.2857142857143
Approximating to 2 decimal places, we have:
P = $14.29
Therefore, the price at which the stock would need to be priced today is approximately $14.29.
c. $1.60 constant annual dividend forever
Substituting the values into equation (1), we have:
P = $1.60 / 0.07 = $22.8571428571429
Approximating to 2 decimal places, we have:
P = $22.86
Therefore, the price at which the stock would need to be priced today is approximately $22.86.
d. $2.90 constant annual dividend forever
Substituting the values into equation (1), we have:
P = $2.90 / 0.07 = $41.4285714285714
Approximating to 2 decimal places, we have:
P = $41.43
Therefore, the price at which the stock would need to be priced today is approximately $41.43.