Question

a firm is expected to pay a dividend of $1.35 next year and $1.50 the following year. Financial analyst believe the stock will be at their price target of $68 in two years. Compute the value of this stock with a required return of 10%.

Answer 1

Sol. The amount of dividend that can be paid for the next year is $1.35. The amount of dividend that can be paid in following year of the next year is $1.50. The price of the stock in two years will be $68. The value of any stock is the present value of its all cash flows from the stock. It can be Calculated by discounting the cash flows from the stock. Following is the fomula to calculate the current price of the stock: 1 Po= DI + De P2 . CAR) CI+RJ2 CHRIE there, R= Required return D = Dividend in next year Da = Dividend in next years following year Po = Current price of stock . P = price of stock in two pars Calculate the value of the stock Ccament price of the stock) by substituting $1.95 for the dividend in next year $1.50 for the dividend in next year's your following & 68 for price of stock in two years, and 0.10 for the required ration in the

formala; Po = Di +R)' - + (+re P CI+R) 2 $1.35 + +1.50 + $ 68 1 Tto.10) C+0.1002 C+0.1012 = $1.227 + $ ). 240 + $ 56.198 - $ 58.67 Therefore, the value of the stock is $58.67)