Question

Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two years. Von Bora's equity cost of capital is 10%. The price you would be willing to pay today for a share of Von Bora stock, if you plan to hold the stock for two years is closest to:

Answer 1

Answer:

Price of share today = $23.17

Explanation:

The value of a stock using the dividend valuation model, is the present value of the expected cash inflows discounted at the required rate of return. The required rate of return is the cost of equity.

The cost of equity is 10% in this scenario

The price of the share will be determined as follows:

                                                                                  $

Present value of Dividend in yr 1 = 1.40× 1.1^(-1)=    1.27

Present value of Dividend  in yr 2 = 1.50 × 1.1^(-2)=1.24

Present value of share in yr 2 = 25× 1.1^(-2) =       20.66

Present value of total  cash inflow                         23.17

Price of share today = $23.17