Question

Knightmare, Inc., will pay a dividend of $5.05, $9.15, and $12.35 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of 10.5 percent on the company's stock. What is the current stock price?

Answer 1

$24.81

Step-by-step explanation:

Given that

Dividends year 1 = 5.05,

Dividends year 2 = 9.15

Dividends year 3 = 12.35

Required return = 0.092 or 9.2 %

Thus,

P = D1/(1 + r) + D2/(1 + r)^2 + D3/(1 + r)^3

P = 5.05/( 1 + 0.092) + 9.15/(1 + 0.092)^2 + 12.35/(1 + 0.092)^3

= $24.81

Answer 2

$21.21

Step-by-step explanation:

to determine the stock price we need to discount the three cash flows:

• cash flow 1 = $5.05
• cash flow 2 = $9.15
• cash flow 3 = $12.35
• discount rate = required rate of return = 10.5%

stock price = CF1 / (1 + r) + CF2 / (1 + r)² + CF3 / (1 + r)³

= $5.05 / (1 + 0.105) + $9.15 / (1 + 0.105)² + $12.35 / (1 + 0.105)³

= $5.05 / 1.105 + $9.15 / 1.105² + $12.35 / 1.105³

= $4.57 + $7.49 + $9.15 = $21.21