Question

You are planning to purchase the stock of Ted's Sheds Inc. and you expect it to pay a dividend of $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You expect to sell the stock for $100 in 3 years. If your required return for purchasing the stock is 12 percent, how much would you pay for the stock today

Answer 1

$81.52

Step-by-step explanation:

To determine the price of the stock, one has to calculate the present value of the stock.

The present value is the sum of discounted cash flows.

Present value can be calculated using a financial calculator

Cash flow in year 1 = $3

Cash flow in year 2 = $4.25

Cash flow for year 3 = $100 + $6 = $106

I = 12 %

Present value = $81.52

The price one would pay for the stock today is $81.52

To find the PV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you