Question

Statement I: The equity financing in the weighted average cost of capital calculation can consist of (i) internal equity financing through common stock; and (ii) external equity financing through retained earnings. Statement II: The liability structure will determine the weights used in weighted average cost of capital calculations.

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An investor plans to buy a common stock and hold this for 5 years. The expected dividends are as follows:

Year 1: $1.25

Year 2: $1.40

Year 3: $1.45

Year 4: $1.50

Year 5: $1.55

This investor expects to sell this stock for $40 at the end of 5 years. The investor requires a return rate of 25%. Based on this information, the present value of the common stock today is equal to:

Group of answer choices

$18.51

$19.51

$20.51

$16.87

Answer 1

year	Dividend	Terminal value	Total cash flow	PVIF @ 25%	Present value
1	1.25		1.25	0.8	$     1.00
2	1.4		1.4	0.64	$     0.90
3	1.45		1.45	0.512	$     0.74
4	1.5		1.5	0.4096	$     0.61
5	1.55	40	41.55	0.32768	$   13.62
Total					$   16.87
Ans =		$    16.87