Question

What is the value of a stock that you believe will sell in three years for $67 a share and will pay $3.00 in dividends next year, and grow dividends at 4% in year 2, and 5% in year 3 assuming your required return is 15%?

Answer 1

Answer:

value of a stock is $51.18

Explanation:

given data

selling price S = $67

dividends 1st year  = $3.00

dividends 2nd year  = 4%

dividends 3rd year  =5%

return = 15%

to find out

value of a stock that you believe will sell in three years

solution

we know here selling price in 3 year is $67

and dividend in 1st year is D1 = $3.00

so

Dividend in 2nd year is = $3.00 (1 + 0.04)

Dividend in 2nd year is D2 =   $3.12

and

Dividend in 3rd  year  = $3.12 (1 + 0.05)

Dividend in 3rd  year D3  = $3.28

so

value of a stock = $\frac{D1}{r} + \frac{D2}{r^2} + \frac{D3}{r^3} + \frac{S}{r^3}$

value of a stock = $\frac{3}{1.15} + \frac{3.12}{1.15^2} + \frac{3.28}{1.15^3} + \frac{67}{1.15^3}$

value of a stock is $51.18