Question

Planned Obsolescence has a product that will be in vogue for 3 years, at which point the firm will close up shop and liquidate the assets. As a result, forecast dividends are DIV1 = $10.00, DIV2 = $10.50, and DIV3 = $26.00. What is the stock price if the discount rate is 11%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock price

Answer 1

According to dividend discount model, current value of share is present value of dividends expected in future.

$P_0 = \frac{Div_1}{(1 + r)^1} + \frac{Div_2}{(1 + r)^2} + \frac{Div_3}{(1 + r)^3}$

$P_0 = \frac{10}{(1 + 0.11)^1} + \frac{10.50}{(1 + 0.11)^2} + \frac{26}{(1 + 0.11)^3}$

$P_0 = 9.01 + 8.52 + 19.01$

$P_0 = 36.54$