Question

3. Ares Inc has just paid an annual dividend of $2.15. You expect dividends to grow at 16% for the next two years, then at a sustainable 4.25% after that. The expected return on the stock is 10.40%. The per share value of Aries is closest to: A) $44.87. B) $53.67. C) $41.08. Div Period 3+ 2.15(1.16) 2.15(1.162 2.15(1.16) (1.0425) PV @ 10.40% 2.2591 2.3736 TV = 49.0406* PV of TV 40.2362 Total 44.8689 *TV = [2.15(1.16)2(1.0425)]/(.104-.0425) = 3.016/(.104-.0425) = 49.0406

I am having trouble finding the correct answer for the step to calculate PV @ 10.40%

Answer 1

Present value=Future value/(1+r)^t

Price=2.15*1.16/(1+10.40%)+2.15*1.16^2/(1+10.40%)^2+2.15*1.16^2*(1+4.25%)/(1+10.40%)^2*1/(10.40%-4.25%)=44.8689319