Question

Your local toy store just announced that it will pay a $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in year 3. At a discount rate of 14 percent, what should one share sell for today?

Answer 1

At a discount rate of 14 percent, the price per share sell for today is $33.43.

Step-by-step explanation:

To find the price per share of stock, we need to calculate the present value of the dividends that will be received at different times. We can use the formula for present value:

PV = D / (1 + r)^n

Where PV is the present value, D is the dividend, r is the discount rate, and n is the number of years in the future the dividend will be received.

Using this formula for each dividend, we get:

PV of $4 dividend in year 1 = $4 / (1 + 0.14)1 = $3.51

PV of $3 dividend in year 2 = $3 / (1 + 0.14)2 = $2.39

PV of $46 liquidating dividend in year 3 = $46 / (1 + 0.14)3 = $27.53

Add up these present values: $3.51 + $2.39 + $27.53 = $33.43

Finally, divide the total present value by the number of shares to get the price per share: $33.43 / 1 = $33.43

Answer 2

It would sell for 761.49 dollars

Step-by-step explanation:

Generally, stock prices are determined on stock market based on supply and demand mechanism. However, according to the discount dividend model present value of stock could be calculated as dividend per share/(cost of capital equity-growth rate). Growth rate between year 1 and 2 is 3-4/4 equals to -0.25%. From year 2 until year 3 it is 46-3/3 equals to 14.33%. Now we can take arithmetic average of these two and we get 7.04%( 14.33-0.25/2). Finally share could sell today for 46+3+4/(14-7.04%) equals to 761.49 dollars