A firm is expected to pay a dividend of $1.55 next year and $1.70 the following

Question

A firm is expected to pay a dividend of $1.55 next year and $1.70 the following year. Financial analysts believe the stock will be at their price target of $50 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.)

A firm is expected to pay a dividend of $1.55 next year and $1.70 the following year. Financial analysts believe the stock will be at their price target of $50 in two years.

Explanation / Answer

the following table shows the required calculation:

Year Discounting factor @11.5% Cash flow Discounted cash flow 1 1 /(1.115) =>0.89686 $1.55 $1.390133 2 1/(1.115)^2=>0.80436 $1.70 $1.3674132 2 1/(1.115)^2=>0.80436 $50 $40.218 Value of stock $42.98

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