Question

ou expect a share of stock to pay dividends of $1.30, $1.55, and $1.60 in each of the next 3 years. You believe the stock will sell for $22.00 at the end of the third year.a. What is the stock price if the discount rate for the stock is 20%

Answer 1

The stock price will be "$15.80".

Step-by-step explanation:

According to the question,

Div 1,

= 1.30

Div 2,

= 1.55

Div 3,

= 1.60

P1 = 22

Now,

The current stock price will be:

Po =
`(Div\ 1)/((1+discount \ rate)) +(Div\ 2)/((1+discount \ rate)^2) +(Div \ 3+P1)/((1+discount \ rate)^3)`

By putting the values, we get

=
`(1.30)/(1.20) +(1.55)/((1.20)^2) +((1.60+22))/((1.20)^3)`

=
`1.08+1.07+13.65`

=
`15.80` ($)