1.8. Picardy Corporation stock pays its annual dividend on every October 15. Its
ID: 2776559 • Letter: 1
Question
1.8. Picardy Corporation stock pays its annual dividend on every October 15. Its expected future dividends are shown in the following table.
Year
2013
2014
2015
2016
2017
Dividend
$1.40
$1.50
$1.60
$1.80
$2.00
In the year 2018, and all the following years, the dividend will remain constant at $2.00. The shareholders of Picardy require a return of 14% on their investment. Find the price of this stock on October 16, 2013, just after it has paid its dividend. What is its price on October 14, 2014, just before it pays its dividend? $13.40, $15.28
Year
2013
2014
2015
2016
2017
Dividend
$1.40
$1.50
$1.60
$1.80
$2.00
Explanation / Answer
Stock price on October 16, 2013 = $1.50 / (1+14%) + $1.60 / (1+14%)2 + $1.80 / (1+14%)3 + $2.00 / [14%*(1+14%)3]
= $13.40
Stock price on October 14, 2014 = $1.50 + $1.60 / (1+14%)+ $1.80 / (1+14%)2 + $2.00 / [14%*(1+14%)2]
= $15.28
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