A stock is expected to pay a $2 dividend in 2 years and a $3 dividend in 3 years. If you expect the price to be $75 in 3 years and if the required return is 9%, what is the stock's present value? (Round to 2 decimal places. Enter only numbers and decimals in your response.)

Question

Houston Walsh

Business

9 February, 03:32

A stock is expected to pay a $2 dividend in 2 years and a $3 dividend in 3 years. If you expect the price to be $75 in 3 years and if the required return is 9%, what is the stock's present value? (Round to 2 decimal places. Enter only numbers and decimals in your response.)

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Answers (1)

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Siena Hampton · Answer 1

What is the stock's present value?

$61,91

Explanation:

To know the present value we apply the following formula:

Present Value = CF / (1 + r) ^t

CF : Cash Flow (Dividend and price of stock)

r : Required Return (9%)

t : Year when the CF are received.

2 3 3 Year

$ 2,00 $ 3,00 $ 75,00 Dividend

9,0% 9,0% 9,0% Rate of Return

$1,68 $2,32 $57,91 Present Value $61,91

The investor receive the first dividen on Year 2 and then the third dividend on Year 3 when it sells the Stock a price of $75.

Each year it's necessary to discount the cash flow an interest rate of 9%