Question

The Crescent Corporation just paid a dividend of $2 per share and is expected to continue paying the same amount each year for the next four years. If you have a required rate of return of 13%, plan to hold the stock for four years, and are confident that it will sell for $30 at the end of four years, how much should you offer to buy it at today?

Answer 1

$24.35

Step-by-step explanation:

Current dividend; D0 = 2

Next, find the price of each dividend at 13% required rate of return;

PV of Yr1 cashflow ; D1 = 2/(1.13) = 1.7699

PV of Yr2 cashflow ; D2 = 2/ 1.13² = 1.5663

PV of Yr3 cashflow ; D3 = 2/ 1.13³ = 1.3861

PV of Yr4 cashflow ; D4 + P4 = 2 + 30 = 32/ (1.13^4) = 19.6262

Next, sum up the Present values;

= 1.7699 + 1.5663 + 1.3861 + 19.6262

= 24.3485

Therefore, you should buy the stock at $24.35