Question

A firm is expected to pay a dividend of $2.95 next year and $3.10 the following year. Financial analysts believe the stock will be at their price target of $60 in two years. Compute the value of this stock with a required return of 12.9 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.).

Answer 1

Answer:

$52.08

Explanation:

The computation of the value of the stock is shown below:

Year    Dividend     Present value factor at 12.9%        Present value      

1           $2.95                  0.886                                       2.6137

2          $3.10                   0.784                                       2.4304

            $60                    0.784                                       47.04

Total present value                                                      $52.08

The present value factor is computed below:

= 1 ÷ (1 + rate) ^ years

For Year 1 = 1 ÷ 1.129^1 = 0.886              

For Year 2 = 1 ÷ 1.129^2 = 0.784