Question

What would you pay for the following stock, today, given a 6% expected return.

Div1 = $2

Div2 = $2.25

Div3 = $3.50

Div4 = $2.75

P4* = $75

*Denotes terminal price (sales price in year 4)

Answer 1

Hi

Stock Price will be equal to sum of present value of all future dividends plus present value of terminal price.

So Current stock Price P = Div1/(1+r) + Div 2/(1+r)^2 + Div3/(1+r)^3 + Div4/(1+r)^4 + P4/(1+r)^4

= 2/(1+6%) + 2.25/(1+6%)^2 + 3.50/(1+6%)^3 + 2.75/(1+6%)^4 + 75/(1+6%)^4

= 1.89 + 2.002 + 2.94 + 2.18 + 59.407

= $68.41

Thanks