You are considering the purchase of Zee Company stock. You anticipate that the c

Question

You are considering the purchase of Zee Company stock. You anticipate that the company will pay dividends of $3.50 per share next year and $4.00 per share the following year. You believe that you can sell the stock for $20.00 per share two years from now. If your required rate of return is 10 percent, what is the maximum price that you would pay for a share of Zee Company stock?

How would I solve this problem? Would i find the growth for the two dividends first?
Please give a detailed answer, and explain how you arrived at your answer.

Explanation / Answer

You are considering the purchase of Zee Company stock. You anticipate that the company will pay dividends of $3.50 per share next year and $4.00 per share the following year. You believe that you can sell the stock for $20.00 per share two years from now. If your required rate of return is 10 percent, what is the maximum price that you would pay for a share of Zee Company stock?

VC = $3.50 (PVIF10%,1) + $24.00 (PVIF10%,2) = $23.02

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