Question

Knightmare, Inc., will pay a dividend of $5.95, $10.05, and $13.25 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of 11.1 percent on the company's stock. What is the current stock price

Answer 1

The current stock price of Knightmare, Inc. is $24.18.

Step-by-step explanation:

To find the current stock price of Knightmare, Inc., we need to calculate the present value of the future dividends and add them up. The formula to calculate the present value of a future cash flow is:

PV = CF / (1 + r)^n

Where PV is the present value, CF is the cash flow, r is the required rate of return, and n is the number of periods. In this case, the required rate of return is 11.1% or 0.111, and the dividends are $5.95, $10.05, and $13.25 for the next three years, respectively.

Using the formula, we can calculate the present value of each dividend:

PV1 = $5.95 / (1 + 0.111)^1 = $5.34

PV2 = $10.05 / (1 + 0.111)^2 = $8.70

PV3 = $13.25 / (1 + 0.111)^3 = $10.14

Finally, we add up the present values of the dividends to find the current stock price:

Stock price = PV1 + PV2 + PV3 = $5.34 + $8.70 + $10.14 = $24.18