Answer:
$13.28
Explanation:
Worth of the stock is the present value of all the cash flows associated with the stock. Dividend is the only cash flow that a stock holder receives against its investment in the stocks. We need to calculate the present values of all the dividend payments.
Formula for PV of dividend
PV of Dividend = Dividend x ( 1 + r )^-n
1st year
PV of Dividend = $1.10 x ( 1 + 11% )^-1 = $0.99
2nd year
PV of Dividend = $1.25 x ( 1 + 11% )^-2 = $1.01
3rd year
PV of Dividend = $1.30 x ( 1 + 11% )^-3 = $0.95
After three years the dividend will grow at a constant rate of 2.5%, so we will use the following formula to calculate the present value
PV of Dividend = [ $1.30 x ( 1 + 2.5% ) / ( 11% - 2.5% ) ] x [ ( 1 + 11% )^-4 ]
PV of Dividend = $10.33
Value of Stock = $0.99 + $1.01 + $0.95 + $10.33 = $13.28
