A firm is expected to pay a dividend of $2.55 next year and $2.85 the following
ID: 2824974 • Letter: A
Question
A firm is expected to pay a dividend of $2.55 next year and $2.85 the following year. Financial analysts believe the stock will be at their price target of $115 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 $2.55 next year and $2.85 the following year. Financial analysts believe the stock will be at their price target of $115 in two years.
Explanation / Answer
Price of stock is the present value of dividend. In two years, price is estimated to be $ 115.It means at the end of two years, present value of future dividends is $ 115. Step-1:Calculation of present value of dividend of two years Year Dividend Discount factor Present Value a b c=1.115^-a d=b*c 1 $ 2.55 0.8969 $ 2.29 2 2.85 0.8044 2.29 Total 4.58 Step-2:Present Value of price of at the end of two years Present Value = Price in 2 years x Discount factor = 115 x 0.8044 = 92.50 Total present value of dividend = 4.58 + 92.50 = 97.08 Thus, Value of stock is $ 97.08
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