Answer:
Ans. The value of this stock today is $27.05
Explanation:
Hi, we have to bring to present value all future dividends of the relevant period of time (that is all 3 year dividends), the horizon period (I mean, from year 4 and beyond) we need to use another formula, which we will also bring to present value.
For the first 3 years, the formula is as follows.
Where r is the discount rate (in our case, 0.15 or 15%), n is the year where the dividend takes place.
For the horizon value, since there is no growth rate from there, the formula is:
We have to bring it to present value (this formula provides the value in year 3 of all future dividends from year 4 and beyond), so the complete formula is:
Now, the whole calculation should look like this:
So, the value of this stock today if the required return is 15 percent is $27.05
Best of luck