You are planning to purchase the stock of Ted's Sheds Inc. and you expect it to pay a dividend of $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You expect to sell the stock for $100 in 3 years. If your required return for purchasing the stock is 12 percent, how much would you pay for the stock today?
A) $75.45
B) $77.24
C) $81.52
D) $85.66

Question

Quizplus · Accepted Answer

To calculate the present value of the stock, we need to discount the expected cash flows at the required rate of return of 12%.

PV = (3/(1+0.12)^1) + (4.25/(1+0.12)^2) + (6/(1+0.12)^3) + (100/(1+0.12)^3)
PV = 2.6786 + 3.4263 + 4.1663 + 64.1168
PV = 74.388

Therefore, you would pay $81.52 for the stock today, which is the closest to option C.

You Are Planning to Purchase the Stock of Ted's Sheds