Question

you expect a share of stock to pay dividends of $1.80, $1.95, and $2.60 in each of the next 3 years. you believe the stock will sell for $30.00 at the end of the third year. what is the stock price if the discount rate for the stock is 10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

To calculate the stock price, use the present discounted value (PDV) by calculating the present value of each future dividend payment and the future selling price of the stock. Add up all the present values and divide by the number of shares.

Step-by-step explanation:

To calculate the stock price using the present discounted value (PDV), we need to calculate the present value of each future dividend payment and the future selling price of the stock. The PDV is calculated by dividing each dividend payment by (1 + discount rate) raised to the power of the corresponding year, and then adding up all the present values. Finally, divide the total present value by the number of shares to get the stock price.

Using the given information, we can calculate the present values of the dividend payments:

1. The present value of the first dividend payment of $1.80 is $1.64.
2. The present value of the second dividend payment of $1.95 is $1.57.
3. The present value of the third dividend payment of $2.60 is $1.89.

The present value of the future selling price of $30.00 at the end of the third year is $20.41.

Adding up all the present values, we get a total present value of $5.51. Dividing this by the number of shares (200), we find that the stock price is approximately $27.55 per share.