Question

A firm is expected to pay a dividend of $2.35 next year and $2.65 the following year. Financial analysts believe the stock will be at their price target of $105 in two years. Compute the value of this stock with a required return of 11.3 percent.

Answer 1

89.01

Step-by-step explanation:

The computation of value of required return is shown below:-

Price 1 = (Dividend 1 ÷ (1 + Interest)) + ((Dividend 2 + Price 2) ÷ (1 + interest)^2)

= (2.35 ÷ (1 + 0.113)) + ((2.65 + 105) ÷ (1 + 0.113)^2)

= (2.35 ÷ 1.113) + (107.65 ÷ 1.238769 )

= 2.111410602 + 86.90078618

= 89.01219679

= 89.01

Therefore for computing the value of required return we simply applied the above formula.