The present value of the stock is $4.091. To calculate this, we need to find the present value of the future dividends and the present value of the future stock price using the formulas for present value.
To calculate the present value of the stock, we need to calculate the present value of the future dividends and the present value of the future stock price. We can use the formula for present value of a growing perpetuity to calculate the present value of the future dividends:
Present Value of Dividends = Dividend / (Required Return - Growth Rate)
Using the given values, the present value of the dividends for the next 2 years is:
Present Value of Dividends = $1.50 / (0.10 - 0.05) + $1.50 / (0.10 - 0.05) * (1 + 0.05)
The present value of the stock price after 2 years can be calculated using the formula for present value of a future cash flow:
Present Value of Stock Price = Future Stock Price / (1 + Required Return)^n
Assuming the stock price stays constant at $1.50 after 2 years, the present value of the stock price is:
Present Value of Stock Price = $1.50 / (1 + 0.10)^2
Adding the present values of the dividends and the stock price, we can calculate the present value of the stock:
Present Value of Stock = Present Value of Dividends + Present Value of Stock Price
Rounding to 3 decimals, the present value of the stock is:
Present Value of Stock = $2.851 + $1.240 = $4.091