Question

You expect a share of stock to pay dividends of $1.00, $1.25, and $1.50 in each of the three years. You believe the stock will sell for $20 at the end of the third year.
What is the stock price if the discount rate for the stock is 10%?

Answer 1

Answer:

$18.095417

Explanation:

To obtain the current stock price, bring all paid dividends and the stock selling price to present value at a 10% rate per year:

$P=\frac{(1.00)}{(1+0.10)}+\frac{(1.25)}{(1+0.10)^2}+\frac{(20+1.50)}{(1+0.10)^3}\\P= \ 18.095417$

*Note that for the dividends paid after the first year, only one period was considered, and for the dividends paid after the second year, only two periods were considered.

The stock price is $18.095417