Keong is considering an investment in Leong's Bar & Grille Corporation. Keong is planning to buy the stock today, hold it for 2 years, and then expects to sell the stock for $30 at the end of 2 years. Keong expects the first dividend to be $1.00 and the second dividend to be $1.30. If Keong requires a 15% rate of return, what is the value of Leong's Bar & Grille common stock to Keong today?
A)$21.58
B)$23.55
C)$24.54
D)$23.67

Question

Quizplus · Accepted Answer

We can use the dividend discount model to calculate the present value of the stock.

PV = D1 / (1+r) + D2 / (1+r)^2 + P / (1+r)^2

where PV is the present value of the stock, D1 and D2 are the dividends in year 1 and 2, P is the expected price of the stock at the end of year 2, and r is the required rate of return.

Substituting the values given in the problem, we get:

PV = 1.00 / (1+0.15) + 1.30 / (1+0.15)^2 + 30 / (1+0.15)^2
PV = 0.8696 + 1.035 + 17.636
PV = $19.54

Therefore, the value of the stock today is $19.54.

Keong Is Considering an Investment in Leong's Bar & Grille