Question

The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17 percent rate of return?

A.$2.83
B. $2.43
C. $2.56
D. $2.60
E. $2.60.

Answer 1

The answer it's $2,38, it would be Option A, because I think the number is wrong is not 2,83 if not 2,38.

Step-by-step explanation:

To know the value of the stock we have to find the Present value of each dividend today, it will be :

The formula to applied it's:

Principal Present Value = CF / (1 + r)^t

Y1: $1,20 / (1+0,17) = $1,03

Y2: $1,00 / (1+0,17)^2 = $0,73

Y2: $1,00 / (1+0,17)^3 = $0,62

Present Value of Stock: $2,38

1 2 3 Year

$ 1,20 $ 1,00 $ 1,00 Dividend

17% 17% 17% Rate of Return

1,03 0,73 0,62 Present Value = $2,38