Miles Hardware has an annual cash dividend policy that raises the dividend each
ID: 2783286 • Letter: M
Question
Miles Hardware has an annual cash dividend policy that raises the dividend each year by 3%. Last year’s dividend was $1.00 per share. Investors want a 15% return on this stock. What is the stock’s price if
a. the company will be in business for 5 years and not have a liquidating dividend?
b. the company will be in business for 15 years and not have a liquidating dividend?
c. the company will be in business for 25 years and not have a liquidating dividend?
d. the company will be in business for 35 years and not have a liquidating dividend?
e. the company will be in business for 75 years and not have a liquidating dividend?
f. forever?
Explanation / Answer
a. the company will be in business for 5 years
=(D/(r-g))*(1-((1+g)/(1+r))^n)
=((1*1.03)/(15%-3%))*(1-((1+3%)/(1+15%))^5)
=3.64
b. the company will be in business for 15 years
=(D/(r-g))*(1-((1+g)/(1+r))^n)
=((1*1.03)/(15%-3%))*(1-((1+3%)/(1+15%))^15)
=6.94
c. the company will be in business for 25 years
=(D/(r-g))*(1-((1+g)/(1+r))^n)
=((1*1.03)/(15%-3%))*(1-((1+3%)/(1+15%))^25)
=8.04
d. the company will be in business for 35 years
=(D/(r-g))*(1-((1+g)/(1+r))^n)
=((1*1.03)/(15%-3%))*(1-((1+3%)/(1+15%))^35)
=8.40
e. the company will be in business for 75 years
=(D/(r-g))*(1-((1+g)/(1+r))^n)
=((1*1.03)/(15%-3%))*(1-((1+3%)/(1+15%))^75)
=8.58
f.
the company will be in business forever
=(1*1.03)/(15%-3%)
=8.58
the above are the answers