You are evaluating the purchase of Charbridge, Inc. common stock which currently pays no dividend and is not expected to do so for many years. Because of rapidly growing sales and profits, you believe the stock will be worth $51.50 in 3 years. If your required rate of return is 16%, what is the stock worth today?
A) $59.74
B) $51.25
C) $32.99
D) $0.00 because stocks that do not pay dividends have no value.

Question

Quizplus · Accepted Answer

The value of the stock today can be calculated using the formula for the present value of a future sum of money, which is PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($51.50), r is the required rate of return (16% or 0.16), and n is the number of years (3). Plugging in the values, we get PV = $51.50 / (1 + 0.16)^3, which calculates to approximately $32.99. This method is used to value stocks that do not pay dividends but are expected to be sold at a future price.

You Are Evaluating the Purchase of Charbridge, Inc