A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with a required return of 10 percent.
A) $65.40
B) $66.67
C) $65.57
D) $79.14

Question

Quizplus · Accepted Answer

The stock's value is the present value of its future cash flows: dividends and the target price. Calculate the present value of each cash flow: $2.00/(1.10) + $2.14/(1.10^2) + $75.00/(1.10^2) = $65.57.

A Firm Is Expected to Pay a Dividend of $2