value of stock today = $15.16.
working:
first let us know the terminal value of stock at the end of year 2:
dividend of year 2 (1+ growth rate) / (required return - growth rate)
=>$1.15*(1.03) / (0.10-0.03)
=>1.1845/0.07
=>$16.9214286.
now,
Present value factor = 1 /(1+r)^n
r=0.10.
n=1,2.
year | cash flow | PV factor | cash flow * PV factor |
1 | 0.25 | 1/(1.10)^1=>0.90909 | 0.2272725 |
2 | 1.15 | 1/(1.10)^2=>0.82645 | 0.9504175 |
2 | 16.9214286 (terminal value as calculated above) | 1/(1.10)^2=>0.82645 | 13.9847147 |
Total | $15.16 |
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