Question

You own 1,150 shares of AbbVie stock. The company plans on issuing a dividend of $1.40 a share one year from today and then issuing a final liquidating dividend of $10.50 a share two years from today. Your required rate of return is 12 percent. Ignoring taxes, what is the value of your holdings in this stock? $11,063.62 $10,218.67 $9,478.54 $8,247.36 $12,541.20

Answer 1

Price of a stock is the present value of all future cash flows receivable from the stock discounted at required rate of return

Expected cash flows are dividend of $1.40 and $10.50 receivable in one and two years

Present value factor

= 1 / ( 1 + r) ^ n

Where,

r = Required rate of return = 12% or 0.12

n = Years = 1 and 2

So, PV Factor for year 2 will be

= 1 / (1.12^2)

= 1 / 1.2544

= 0.797194

The following table shows the calculations

Calculations	A	B	C = A x B
Year	Cash Flow	PV Factor	Present Value
1	1.4	0.892857	1.25
2	10.5	0.797194	8.37
		Total	9.62

So, the price of one stock is $9.62

So, Value of entire holding of 1,150 stocks

= Number of stocks x Price per stock

= 1,150 x $9.62

= $ 11,063.61

So, as per above calculations, option A is the correct option