Maritime Bank recently announced that its next semiannual dividend (to be paid six months from now) will be $1.00 per share. A stock analyst’s best estimate for the growth in future dividends is 5% compounded semiannually.
a. If you require a rate of return of 10% compounded semiannually on the stock, what maximum price should you be willing to pay per share? Ignore the present value of dividends beyond a 50-year time horizon.
b. What price do you obtain if you do not ignore dividends beyond 50 years? (Use a large value, say 99,999, for n in the present value calculation.)