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A stock is expected to pay a $2 dividend in 2 years and a $3 dividend in 3 years. If you expect the price to be $75 in 3 years and if the required return is 9%, what is the stock's present value? (Round to 2 decimal places. Enter only numbers and decimals in your response.)

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mltn1980

Answer:

  • What is the stock's present value?

    $61,91    

Explanation:

To know the present value we apply the following formula:

Present Value  =  CF /  (1 + r)^t    

CF : Cash Flow (Dividend and price of stock)

r : Required Return (9%)

t : Year when the CF are received.

 2     3       3  Year

$ 2,00 $ 3,00 $ 75,00  Dividend

9,0% 9,0% 9,0%  Rate of Return

$1,68   $2,32   $57,91   Present Value      $61,91        

The investor receive the first dividen on Year 2 and then the third dividend on Year 3 when it sells the Stock a price of $75.

Each year it's necessary to discount the cash flow an interest rate of 9%

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