Answer:
The stock should sell for = $7.37
Explanation:
The value of a share is the sum of the present values of its expected future cash flows discounted at its shareholders' required rate of return.
In other words, the worth of a share is the amount that needs to be invested today at the required rate of return to equal the total sum of the future dividends expected from the share.
To calculate the value of a share, we calculate the present value of the future dividends using the required rate of return
Present Value = (1+r)^(-n) × Cash flow
Lets apply this to information provided for Car Parts Center:
Year 1= (1+0.17)^(-1) × 1.20 = 1.03
Year 2 = (1+0.17)^(-2) × 1.35=0.99
Year 5 = (1+0.17)^(-5) × 11.75=5.36
Value of share = 1.03 + 0.99 + 5.36 = $7.37
The stock should sell for = $7.37
