Fred Tibbits has made a detailed study of the demin clothing industry. He\'s par

Question

Fred Tibbits has made a detailed study of the demin clothing industry. He's particularly interested in a company called Denhart Fashions that makes stylish denim apparel for tenagers and children. Fred has done a forecast of Denhart's earnings and looked at its dividend payment record. He's come to the conclusion that the firm will a dividend of $5.00 for the next two years followed by a year of $6.50. Fred's investment plan is to buy Denhart now, hold it for 3 years, and then sell. He thinks the price will be about $75 when he sells. What is the most should be willing to pay for a share of Denhart if he can earn 10% on investments of similar risk?

Explanation / Answer

He should pay maximum of $69.91 for the stock

Year

1 2 3 Cash flows 5 5 81.5 Discounting 0.909091 0.826446 0.751315 Present value 4.545455 4.132231 61.23216 Total value 69.90984

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