Question

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be

Answer 1

Price of stock = $96.19

Step-by-step explanation:

According to the dividend valuation model , the current price of a stock is the present value of the expected future dividends discounted at the required rate of return

This principle can be applied as follows:

The value of cash flow the stock today is the present value of the future cash flow discounted at the required rate of return

Price of stock = D1/(1+r) + P/(1+r)

D1= dividend in year 1

r- discount rate - 5%

P- Price in year 1

DATA

D1- 1,

r- 5%

P- 100

Price of stock = 1/(1.05) + 100/(1.05) = 96.19

Price of stock = $96.19