Question

A company paid an annual dividend of $2.50 per share yesterday. The dividend is expected to remain constant for three years. At year three, after receiving the dividend, the stock can be sold for $47 a share. If the appropriate discount rate for the stock is 9.4 percent, what is the price of the stock today

Answer 1

$42.18

Step-by-step explanation:

The price of the stock = Dividend in year 1 / (1 + discount rate)^1 + Dividend in year 2 / (1 + discount rate)^2 + Dividend in year 3 / (1 + discount rate)^3 + Price in year 3 / (1 + discount rate)3^

The price = $2.5 / 1.094 + $2.5 / 1.0942 + $2.5 / 1.0943 + $47 / 1.0943

The price = $2.5 / 1.094 + $2.5 / 1.0942 + $49.5 / 1.0943

The Price = $42.18