A firm is expected to pay a dividend of $2.25 next year and $2.40 the following year. Financial analysts believe the stock will be at their price target of $85 in two years.

Compute the value of this stock with a required return of 12.2 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Question

12-12-2022
Mathematics

Answered

A firm is expected to pay a dividend of $2.25 next year and $2.40 the following year. Financial analysts believe the stock will be at their price target of $85 in two years.

Compute the value of this stock with a required return of 12.2 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer :

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ewomazinoade ewomazinoade · Answer 1 · 2022-12-14T14:41:12-05:00

The value of the stock given the cash flows and the required return is $71.43.

What is the value of the stock?

In order to determine the value of the stock, determine the present value of the cash flows from the stock. The cash flows are the dividend payments in year one and 2 and the price target at the end of year 2.

Present value is the sum of the discounted cash flows expected from a project.

Present value = 2.25 / 1.122 + 2.40 / 1.122² + 85 / 1.122² = $71.43

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