Question

Stock QWE plans to pay dividends of $3.00, $3.50, and $4.00 in each of the next three years. If the price of this stock will be $50.00 at the end of three years and the required rate of return by shareholders is 15%, then what is the value of the stock today

Answer 1

$40.76

Step-by-step explanation:

Calculation of the value of the stock today

First step is find the value of stock for each year.

The Value of stock today will be:

First year =($3.00 / 1.15^¹)

First year=($3.00/1.15)

First year=$2.61

Second year= ($3.50 / 1.15^²)

Second year =($3.50/1.3225)

Second year =$2.65

Third year= ($4.00 / 1.15^3)

Third year=($4.00/1.520875)

Third year =$2.63

End of third year= ($50.00 / 1.15^3)

End of third year = ($50.00/1.520875)

End of third year =$32.88

Last step is to add the amount for each year up

V0= $2.61 + $2.65 + $2.63 + $32.88

V0= $40.76

Therefore the value of the stock today will be $40.76