Question

Harry Harrison wishes to purchase the common stock of the Hudson Hairpin Corp. The company is projecting that they will pay annual dividends in the amount of $2.00, $2.50, $3.00, $3.50, and $4.00 over the next five years, respectively. Harry expects that he will be able to sell the stock at the end of the fifth year for $65.00. If his required rate of return is 18.25%, what will he pay for the stock today ?

Answer 1

Here we will find the present value of all the dividends and stock price by discounting it @18.25%.

The Sum of all those present values will equal today's stock price.

Year	Amount	The present value of the Amount
1	2	2 /(1.1825)^1
2	2.5	2.5/(1.1825)^2
3	3	3/(1.1825)^3
4	3.5	3.5/(1.1825)^4
5	4 + 65 = 69	69/(1.1825)^5
	Amount to pay for the stock today	Sum of PV = 36.93 Answer

He will pay $36.93 for the stock today.

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