Question

Knightmare, Inc., will pay a dividend of $6.85, $10.95, and $14.15 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of 10.6 percent on the company's stock. What is the current stock price?

$32.14

$28.34

$30.52

$25.60

$37.33

Answer 1

Current Stock Price

The Current share price is the present value of the future dividend payments

Dividend per share Year 1 (D1) = $6.85 per share

Dividend per share Year 2 (D2) = $10.95 per share

Dividend per share Year 3 (D3) = $14.15 per share

Required Rate of Return (r) = 10.60%

Therefore, the Current Stock Price = D1/(1 + r)¹ + D2/(1 + r)² + D3/(1 + r)³

= [$6.85 / (1 + 0.1060)¹] + [$10.95 / (1 + 0.1060)²] + [$14.15 / (1 + 0.1060)³]

= [$6.85 / 1.1060] + [$1095 / 1.22324] + [$14.15 / 1.35290]

= $6.19 + $8.95 + $10.46

= $25.60 per share

“Hence, the Current Stock Price would be $25.60”