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20 December, 02:10

You are considering buying a share of stock in XYZ Corporation. At the end of years 1, 2, and 3 the stock will pay you a dividend of $15. In addition, at the end of the third year you expect to sell the share of stock for $100. If the interest rate is 3%, how much is the share of XYZ stock worth to you today

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  1. 20 December, 02:36
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    The stock price will be the present value of this investment which is at $133.735.

    Explanation:

    The cash inflows which is dividend here will be discounted at 3% annuity fator by:

    Present value of cash dividend = Cash flow * Annuity factor for 3 years at 3%

    PV = $100 * [1 - (1+3%) ^3 years] / 3% = $15 * 2.829 = $42.235

    The present value of the future cash inflow arising from the sales of stock for $100 can be calculated by:

    Present Value = Cash inflow * Discount factor

    Present Value = $100 * (1+3%) ^3 years = $100 * 0.915 = $91.5

    Total Present Value = Present Value of Dividends + Present value of stock

    Total Present Value = $42.235 + $91.5 = $133.735
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