Deluxe Company expects to pay a dividend of $2 per share at the end of year-1, $3 per share at the end of year-2 and then be sold for $32 per share. If the required rate on the stock is 15%, what is the current value of the stock?
A) $28.20
B) $32.17
C) $32.00
D) None of the given answers

Question

Quizplus · Accepted Answer

The current value of the stock is calculated by discounting the expected cash flows (dividends and sale price) to the present value using the required rate of return. The present value of $2 received in year 1 is $2 / (1.15)^1 = $1.74, the present value of $3 received in year 2 is $3 / (1.15)^2 = $2.27, and the present value of $32 received in year 2 is $32 / (1.15)^2 = $24.19. Adding these values gives $1.74 + $2.27 + $24.19 = $28.20.

Deluxe Company Expects to Pay a Dividend of $2 Per