Final answer:
The current stock price is $100.94, calculated as the present discounted value of future cash flows, including dividends and the projected stock sale price, discounted at a 12% rate of return.
Step-by-step explanation:
Calculating the Current Stock Price
The current stock price is the present discounted value of expected future cash flows, which includes projected dividends and final sale price of the stock. Given the future dividends D1 = $3.5475, D2 = $4.5763, D3 = $5.9034, and the projected stock sale price in year 3 P3 = $126.33, we can calculate the present value of these cash flows by discounting them back to their present value at the required rate of return of 12% (rs). After registering the cash flows and applying the discount rate, the net present value (NPV) is given as $100.94, which represents the current stock price.
To apply the concept of present discounted value to a practical example, say a company has 200 shares and expects profits of $51.3 million. Dividing the PDV of total profits by the number of shares, i.e., $51.3 million/200, will give the price per share. In this case, it would be approximately $256,500 per share.