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

Answer:

The price of the stock will be $18.04

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

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 2

time 9

rate 0.11

$2 \times \frac{1-(1+0.11)^{-9} }{0.11} = PV$

PV $11.0741

Then, PV of the liquidating dividend:

PRESENT VALUE OF LUMP SUM

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  20.00

time   10.00

rate  0.11

$\frac{20}{(1 + 0.11)^{10} } = PV$  

PV   7.04

$11.07 + $7.04 =  $ 18.04