The current value of the Deluxe Company stock is approximately $28.20. Option D is the right choice.
Stock Valuation of Deluxe Company
Assumptions:
Dividend in Year 1 = $2
Dividend in Year 2 = $3
Selling price at the end of Year 2 = $32
Required rate of return (r) = 15%
Calculate the present value of dividends:
PV(Dividend Year 1) = $2 / (1 + r)^1 = $2 / 1.15 = $1.74
PV(Dividend Year 2) = $3 / (1 + r)^2 = $3 / 1.3225 = $2.27
Total PV of dividends = $1.74 + $2.27 = $4.01
Calculate the present value of selling price:
PV(Selling Price) = $32 / (1 + r)^2 = $32 / 1.3225 = $24.18
Calculate the current value of the stock:
Current Value = PV(Dividends) + PV(Selling Price)
Current Value = $4.01 + $24.18
Current Value = $28.19 ≈ $ 28.20
Option d is the right choice.
Question:
Deluxe Company expects to pay a dividend of $2 per share at the end of year 1. $3 per share at the end of year 2. and then be sold for $32 per share at the end of year 2. If the required rate of return on the stock is 15%, what is the current value of the stock?
a. $32.17
b. $32
c. $29.18
d. $28.20