CK Company stockholders expect to receive a year-end dividend of $5 per share and then immediately sell their shares for $115 dollars per share. If the required rate of return for the stock is 20 percent, what is the current value of the stock?

Question

Quizplus · Accepted Answer

The current value of the stock can be calculated using the dividend discount model for a single period, which is given by the formula: $ P_0 = \frac{D_1 + P_1}{1 + r} $, where $P_0$ is the current price of the stock, $D_1$ is the dividend at the end of the first period, $P_1$ is the price of the stock at the end of the first period, and $r$ is the required rate of return. Plugging in the given values: $ P_0 = \frac{5 + 115}{1 + 0.20} = \frac{120}{1.20} = 100 $.

CK Company Stockholders Expect to Receive a Year-End Dividend of $5