A firm recently paid a $0.50 annual dividend. The dividend is expected to increase by 10 percent in each of the next three years. In the third year, the stock price is expected to be $110. If the required return is 15 percent, what is its value?

Question

Quizplus · Accepted Answer

The value of the stock is calculated by finding the present value of the expected dividends and the stock price in year 3. The dividends for the next three years are $0.55, $0.605, and $0.6655. The present value of these dividends and the stock price ($110) at a 15% discount rate gives the stock value of $73.71.

A Firm Recently Paid a $0