Question

Flash Freeze Frozen Foods is expected to pay annual dividends of $1.34 and $1.45 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.50 a share. What is the value of this stock at a required return of 15.1 percent?

Answer 1

Answer:

$9.76

Explanation:

Find the present value of each year's dividend;

PV(of D1) = 1.34 / (1.151)= 1.1642

PV(of D2) = 1.45 / (1.151²)= 1.0945

Find the PV of terminal cashflow;

PV(of D3 onwards) = $\frac{\frac{1.50}{0.151} }{(1.151)^{2} } \\ \\ = \frac{9.9338}{1.324801}$

PV(of D3 onwards)= 7.4983

Next, sum up the PVs of dividends to find the price of the stock;

1.1642 + 1.0945 + 7.4983

= 9.757

Therefore, the price is $9.76