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

$52.08

Step-by-step 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