Question

What is the value of a stock that you believe will sell in three years for $67 a share and will pay $3.00 in dividends next year, and grow dividends at 4% in year 2, and 5% in year 3 assuming your required return is 15%?

Answer 1

value of a stock is $51.18

Step-by-step explanation:

given data

selling price S = $67

dividends 1st year = $3.00

dividends 2nd year = 4%

dividends 3rd year =5%

return = 15%

to find out

value of a stock that you believe will sell in three years

solution

we know here selling price in 3 year is $67

and dividend in 1st year is D1 = $3.00

so

Dividend in 2nd year is = $3.00 (1 + 0.04)

Dividend in 2nd year is D2 = $3.12

and

Dividend in 3rd year = $3.12 (1 + 0.05)

Dividend in 3rd year D3 = $3.28

so

value of a stock =
`(D1)/(r) + (D2)/(r^2) + (D3)/(r^3) + (S)/(r^3)`

value of a stock =
`(3)/(1.15) + (3.12)/(1.15^2) + (3.28)/(1.15^3) + (67)/(1.15^3)`

value of a stock is $51.18