Question

You are considering buying a share of stock in Company ABC. At the end of years 1, 2, and 3 the stock will pay you a dividend of $10. In addition, at the end of the third year you expect to sell the share of stock for $200. If the interest rate is 5%, how much is the share of ABC stock worth to you today

Answer 1

$200

Step-by-step explanation:

The computation of the share of the ABC stock worth to you today is shown below:

PV = Annual dividend (P/A, i, n) + Sale value (P/F, i, n)

i denotes the interest rate

n denotes the time period

= $10 (P/A, 5%, 3) + $200 (P/F, 5%, 3)

= ($10 × 2.7232) + ($200 × 0.8683)

= $27.23 + $172.76

= $199.99

= $200

Basically we determine the present value