Deluxe Company expects to pay a dividend of $2 per share at the end of year 1,$3 per share at the end of year 2,and then be sold for $32 per share at the end of year 2.If the required rate of return on the stock is 15%,what is the current value of the stock?

Question

Quizplus · Accepted Answer

The correct answer is A because the current value of the stock is $28.20. This is calculated by using the dividend discount model, which takes into account the present value of the future dividends and the sale price of the stock. The formula for the dividend discount model is:Current value of the stock = (Dividend in year 1 / (1 + required rate of return)^1) + (Dividend in year 2 / (1 + required rate of return)^2) + (Sale price of the stock / (1 + required rate of return)^2)Plugging in the values from the question, we get:Current value of the stock = ($2 / (1 + 0.15)^1) + ($3 / (1 + 0.15)^2) + ($32 / (1 + 0.15)^2)= $28.20

Deluxe Company Expects to Pay a Dividend of $2 Per