Pasqually mineral water, inc., will pay a quarterly dividend per share of $1.55 at the end of each of the next 12 quarters. thereafter, the dividend will grow at a quarterly rate of 1.5 percent, forever. the appropriate rate of return on the stock is 12 percent, compounded quarterly. what is the current stock price?

$88.99

Explanation:

First, find the Present value of the dividends;

The quarterly constant dividend of 1.55 for the 12 quarters is in form of an annuity, therefore, you can find its PV using a financial calculator with the following inputs;

Recurring payment ;PMT = 1.55

Total quarters; N= 12

Quarterly interest rate; I/Y = 12%/4 = 3%

Future one time payment; FV = 0

Then compute Present value ; CPT PV = 15.429

Find PV of terminal cashflow of the constant growing dividend;

Div 13 = Div12 (1+g) = 1.55(1.015) = 1.5733

PV (Div13 onwards)

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

= 15.429 + 73.5634

= $88.99

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answer; rapid growth in buyer demand and high buyer switching cost;