Answer:
Price of the stock today=$35.9
Step-by-step explanation:
The value of a stock, using the dividend valuation model, is the Present value (PV) of its future cash flows discounted at the required rate of return
The dividend for three years is an annuity. Hence we discount using the present value of annuity.
PV of annuity = A× 1- (1+r)^(-n)/r
r- discount rate, n- number of years, A- annual dividend
PV of annual dividend= 1.20 × (1- 1.09^(-3)/0.09)=3.037
The expected selling price of the stock in year three is a lump sum.
The PV of a single sum is given as
PV of a single sum = F× (1+r)^(-n)
FV- Future value , n- number of years, r- discount rate
PV of sales value in three years = 42.60 × 1.09^(-3)=32.8
Price of the stock today = 3.037 + 32.895 =35.9
Price of the stock today=$35.9