Final answer:
The current value of one share of River Stock is calculated by discounting each future dividend payment and the sale price back to their present values, then summing these amounts. Using the given dividends, sale price in Year 6, and a required return of 11.4%, the current share value is approximately $55.905. This value does not match any of the provided options, suggesting a possible mistake in the question or answers.
Step-by-step explanation:
To calculate the current value of one share of River Stock, we need to determine the present value (PV) of each dividend and the present value of the expected sale price of the shares. This involves discounting each cash flow by the required return of 11.4% to its present value:
- PV of $1.36 in Year 1: $1.36 / (1 + 0.114)^1
- PV of $1.15 in Year 2: $1.15 / (1 + 0.114)^2
- PV of $1.35 in Year 3: $1.35 / (1 + 0.114)^3
Summing all these present values will give us the current share value. We do not include cash flow for Year 5, as the company is sold in Year 6. Let's do the calculations:
- PV of Year 1 dividend: $1.36 / 1.114 ≈ $1.221
- PV of Year 2 dividend: $1.15 / 1.114^2 ≈ $0.924
- PV of Year 3 dividend: $1.35 / 1.114^3 ≈ $0.989
Adding these values together gives us: $1.221 + $0.924 + $0.989 + $1.123 + $51.648 = $55.905. The current value of one share of River Stock is therefore approximately $55.905. However, none of the provided answer choices match this calculation, indicating there might be a typo in the question or options provided.