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A firm is expected to pay a dividend of $2.55 next year and $2.85 the following...

A firm is expected to pay a dividend of $2.55 next year and $2.85 the following year. Financial analysts believe the stock will be at their price target of $115 in two years.


Compute the value of this stock with a required return of 11.5 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Solutions

Expert Solution

Price of stock is the present value of dividend.
In two years, price is estimated to be $ 115.It means at the end of two years, present value of future dividends is $ 115.
Step-1:Calculation of present value of dividend of two years
Year Dividend Discount factor Present Value
a b c=1.115^-a d=b*c
1 $       2.55      0.8969 $       2.29
2 2.85      0.8044           2.29
Total           4.58
Step-2:Present Value of price of at the end of two years
Present Value = Price in 2 years x Discount factor
=            115 x      0.8044
=         92.50
Total present value of dividend =           4.58 +         92.50
=         97.08
Thus,
Value of stock is $ 97.08

jeff jeffy answered 3 years ago
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