Value of Dividends and Future Price 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

Using the dividend discount model, we can calculate the present value of the future dividends and the target stock price to determine the value of the stock today.

PV = (Div1 / (1 + r)^1) + (Div2 / (1 + r)^2) + (Price2 / (1 + r)^2)

PV = ($2.00 / 1.10) + ($2.14 / 1.10^2) + ($75.00 / 1.10^2)

PV = $1.82 + $1.68 + $61.39

PV = $64.89

Therefore, the value of the stock today with a required return of 10 percent is $65.57, which is closest to option C.

Value of Dividends and Future Price a Firm Is Expected