Value of Dividends and Future Price 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

To calculate the value of the stock, we need to compute the present value of both dividends and the target price, and then add them up.

PV (dividend next year) = $3 / (1 + 0.13) = $2.65 
PV (dividend in two years) = $3.21 / [(1 + 0.13)^2] = $2.42 
PV (target price) = $80 / [(1 + 0.13)^2] = $56.30

Therefore, the value of the stock is:

PV (dividend next year) + PV (dividend in two years) + PV (target price) = $2.65 + $2.42 + $56.30 = $61.37

The closest answer choice to $61.37 is C) $67.82. Therefore, the best choice is C.

Value of Dividends and Future Price a Firm Is Expected