CK Company stockholders expect to receive a year-end dividend of $5 per share and then immediately sell their shares for $115 dollars per share.If the required rate of return for the stock is 20%,what is the current value of the stock?

Question

Quizplus · Accepted Answer

The current value of the stock is calculated using the formula for the present value of future cash flows: $ P_0 = \frac{D_1 + P_1}{1 + r} $, where $ D_1 $ is the dividend, $ P_1 $ is the price at which the stock is sold, and $ r $ is the required rate of return. Substituting the given values: $ P_0 = \frac{5 + 115}{1.20} = 100 $.

CK Company Stockholders Expect to Receive a Year-End Dividend of $5