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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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  1. 9 February, 03:36
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    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%
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