Question

Keidis Industries will pay a dividend of $2.85, $3.95, and $5.15 per share for each of the next three years, respectively. In four years, you believe that the company will be acquired for $46.00 per share. The return on similar stocks is 9.5 percent. What is the current stock price

Answer 1

Answer:

$41.82

Explanation:

Present value factor = 1 ÷ (1 + r)^n

Current stock price  = $41.82

Working Note

Year Cash flow Present Value factor cash flow × Present factor

1 2.85       1 ÷ (1.095)^1 = 0.91324     2.85 × 0.91324 = 2.6027

2 3.95       1 ÷ (1.095)^2 = 0.83401    3.95 × 0.83401 = 3.2943

3 5.15              1 ÷ (1.095)^3 = 0.76165    5.15 × 0.76165 = 3.9224

4 46.00       1 ÷ (1.095)^4 = 0.69557    46.00 × 0.69557 =31.99622

                             Current stock price                                         $41.82