Answer:
The value of this stock today at a discount rate of 12 percent is $17.24
Explanation:
According to the given data we would have to calculate first the followng:
Year 4 dividend = 1.45 * 1.04 = 1.508
Value at year 3 = D4 / required rate - growth rate
Value at year 3 = 1.508 / 0.12 - 0.040
Value at year 3 = 18.85
Therefore, Value of stock today = 1.72 / ( 1 + 0.12)∧1 + 1.60 / ( 1 + 0.12)∧2 + 1.45 / ( 1 + 0.12)∧3 + 18.85 / ( 1 + 0.12)3
=1.53+1.27+1.03+13.41
Value of stock today = $17.24
The value of this stock today at a discount rate of 12 percent is $17.24
Answer:
$15.85
Explanation:
Worth of the stock is the present value of all the cash flows associated with the stock. Dividend is the only cash flow that a stock holder receives against its investment in the stocks. We need to calculate the present values of all the dividend payments.
Formula for PV of dividend
PV of Dividend = Dividend x ( 1 + r )^-n
1st year
PV of Dividend = $1.75 x ( 1 + 12% )^-1 = $1.56
2nd year
PV of Dividend = $1.60 x ( 1 + 12% )^-2 = $1.28
3rd year
PV of Dividend = $1.45 x ( 1 + 12% )^-3 = $ 1.03
After three years the dividend will grow at a constant rate of 4%, so we will use the following formula to calculate the present value
PV of Dividend = [ $1.45 x ( 1 + 4% ) / ( 12% - 4% ) ] x [ ( 1 + 12% )^-4 ]
PV of Dividend = $11.98
Value of Stock = $1.56 + $1.28 + $1.03 + $11.98 = $15.85
