Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 in one year and $11 in two years? The stock will be sold in 2 years for an estimated price of $120.The appropriate discount rate is 8%.

Question

Quizplus · Accepted Answer

We can use the formula for the present value of a stock with constant growth, which is:

PV = (Dividend / (r - g)) + (P / (1 + r)^n)

where PV is the present value of the stock, Dividend is the expected dividend in the first year, r is the discount rate, g is the expected growth rate of dividends, P is the expected sale price of the stock, and n is the number of years until the sale.

Plugging in the given values, we get:

PV = (10 / (0.08 - 0.11)) + (120 / (1 + 0.08)^2) 
PV = $121.57

Therefore, the closest value to the amount that should be paid for the stock is $121.57.

Which of the Following Values Is Closest to the Amount