Question

Springfield Nuclear Power, Inc. will pay dividends of $1, $2, and $2.50 over the next 3 years. After 3 years, dividends will grow at 10%. The cost of equity (the discount rate) on this stock is 15%. What should the stock price be today

Answer 1

Answer:

Explanation:

To find the price of the stock today, first find the present value of the dividends and then the value of the stock growing at a constant rate. Add the two results together

Present value can be found using a financial calculator

Cash flow in year 1 = $1

Cash flow in year 2 = $2

Cash flow in year 3 = $2.50

i = 15%

present value = $4.03

the value of the stock growing at a constant rate

dividend in year 3 x ( 1 + growth rate) / cost of equity - growth rate

$2.5(1.1) / 0.05 = $55

$55 + $4.03 = $59.03

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute