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
