Question

Assume that the expected future dividends (D) at end of periods 1,2, and 3, as well as the expected future price (P) at end of period 3 for a stock are as follows: D1 = $1.20, D2 = $1.40, D3 = $1.55, and P3 = $82 . What should be the stock's expected price today, (i.e. P0 )? I encourage you to draw a time line clearly indicating the situation. Assume the required return is 8.9 percent.

Answer 1

$66.9725

Step-by-step explanation:

Data provided in the question:

Dividend:

D1 = $1.20

D2 = $1.40

D3 = $1.55

Expected future price, P3 = $82

Required return = 8.9 percent = 0.089

Now,

Stock price today = Present value of dividends and the future value

Stock price today =
`(1.20)/((1+0.089))+(1.40)/((1+0.089)^2)+(1.55)/((1+0.089)^3)+(82)/((1+0.089)^3)`

or

Stock price today = 1.1019 + 1.1805 + 1.2001 + 63.49

or

Stock price today = $66.9725