Question

over the next two years, YXZ will oay a divudend of $2.00 ans $2.75 in years 1 and 2, respectively,. thereafter, dividends will grow at a rate 2% peruear. what is the current value of the firms stock assuming a required rate of return of 15%?

$19.81

$20.13

$20.42

$21.38

Answer 1

$20.13

As per dividend discount model, current value of stock is present value of dividend.
Step-1:Present value of dividend of next two years
Year	Dividend	Discount factor	Present value
1	$       2.00	0.869565	$       1.74
2	$       2.75	0.756144	$       2.08
Total			$       3.82
Working:
	Discount factor of :
	Year 1	1.15^-1	=	0.869565
	Year 2	1.15^-2	=	0.756144
Step-2:Present value of dividend of year 3 onwards
Present value	=	D2*(1+g)/(K-g)*DF2			Where,
	=	2.75*(1+0.02)/(0.15-0.02)*0.756144			D2	Year 2 dividend	$       2.75
	=	$    16.32			g	Growth rate	2%
					K	Required return	15%
					DF2	Discount factor of year 2	0.756144
Step-3:Value of stock
	Value of stock	=	Present value of dividends
		=	$       3.82	+	$    16.32
		=	$    20.13