Question

What would the year 3 stock price need to be to meet your required rate of return of 13%?

Answer 1

Answer: $105.49

Step-by-step explanation:

The Value of the stock today is given by;

`P = (D1)/(1 + r) + (D2)/((1+r)^2) + (D3)/((1+r)^3) + (P3)/((1+r)^3)`

`80 = (2)/(1 + 0.13) + (3)/((1+0.13)^2) + (4)/((1+0.13)^3) + (P3)/((1+0.13)^3)`

`P3 = (80 * {1.13^3) - ((2)/(1.13) + (3)/(1.13^2) + (4)/(1.13^3))`

P3 = $105.49