Calculate the present value of a stock if this stock is expectedto pay $1.75 dividend...

Calculate the present value of a stock if this stock is expected to pay $1.75 dividend in the next six years and then in year 7 and thereafter it pays $2 constant dividend forever. The interest rate is 8%. Please provide excel formula and step-by-step explanations on your calculation to get your final answer.

Solutions

Expert Solution

Step 1: The present value of the first six years of dividends

PV = PV(rate, nper, pmt, [fv], [type])

rate = 8%

nper = 6

pmt = 1.75

PV = PV(8%,6,1.75)

Ignore [fv] and [type] they are optional

PV = $8.090039412

Step 2: The present value of the constant dividend from year 7 and beyond

PV = Div7/r

This formula gives the present value as of year 6. So...

PV6 = Div7/r

PV6 = 2/0.08

PV6 = $25

Now, we need to discount this to get the present value as of today

PV = PV6/(1 + r)^6

PV = 25/(1 + 0.08)^6

PV = $15.7542406721

Step 3: Add the results from step 1 and step 2 to get the final answer

The present value of the stock = 8.090039412 + 15.7542406721

The present value of the stock = $23.8442800841

jeff jeffy answered 2 years ago

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