A firm is expected to pay a dividend of $3.00 next year and $3.21 the following year. Financial analysts believe the stock will be at their target price of $80.00 in two years. Compute the value of this stock with a required return of 13 percent.
A) $50.00
B) $67.52
C) $67.82
D) $86.21

Question

Quizplus · Accepted Answer

The value of the stock can be calculated using the dividend discount model for a two-year period, plus the target price discounted back to the present value. The formula is: $$PV = \frac{D1}{(1+r)^1} + \frac{D2 + P}{(1+r)^2}$$ where $D1$ is the dividend in year 1, $D2$ is the dividend in year 2, $P$ is the target price in year 2, and $r$ is the required return. Plugging in the values: $$PV = \frac{3}{(1+0.13)^1} + \frac{3.21 + 80}{(1+0.13)^2} = \frac{3}{1.13} + \frac{83.21}{1.2769} = 2.65 + 65.17 = 67.82$$

A Firm Is Expected to Pay a Dividend of $3