KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent?

Question

Quizplus · Accepted Answer

To find the stock price, we need to calculate the Present Value (PV) of all future dividends and the future stock price at the end of year 3.

Year 1: PV = $1.48 / (1 + 0.146) = $1.29
Year 2: PV = $1.60 / (1 + 0.146)^2 = $1.21
Year 3: PV = $1.75 / (1 + 0.146)^3 = $1.12
Future Price at end of Year 3: PV = $1.90 / (0.146 - 0.02) = $16.33

The Total PV of all future cash flows is then:
Total PV = $1.29 + $1.21 + $1.12 + $16.33 = $20.95

Therefore, the stock is worth $20.95 per share if you require a return of 14.6 percent.

Out of the given answer choices, the closest one is C, $12.32, so that is the best choice. The other answer choices either are too high or too low based on the calculation above.

KNJ Companies Is Preparing to Pay Annual Dividends of $1