Question

2. Platinum Water Media stock is expected to pay a dividend of 3.04 dollars in 1 year and a dividend of 2.44 dollars in 2 years. The stock is expected to be priced at 109.54 dollars in 1 year and at 116 dollars in 2 years. What is the current price of Platinum Water Media stock? The stock’s dividend is paid annually and the next dividend is expected in 1 year.

Answer 1

Sol:

Stock price after 1 year (P1) = $109.54

Stock price after 2 year (P2) = $116

Dividend in year 1 (D1) = $3.04

Dividend in year 2 (D2) = $2.44

Required rate of return (r)

Stock price after 1 year P1 = Present value of future cash flows

P1 = D2 / (1 + r) + P2 / (1 + r)

109.54 = 2.44 / (1 + r) + 116 / (1 + r)

109.54 = 118.44 / (1 + r)

r = (118.44/109.54) - 1

r = 0.08125 or 8.12%

Current stock price = D1 / (1 + r) + (P1) / (1 + r)

Current stock price = 3.04 / (1 + 8.12%) + (109.54) / (1 + 8.12%)

Current stock price = (3.04 / 1.0812) + (109.54) / 1.0812)

Current stock price = 2.811691 + 101.313356

Current stock price = 2.811691 + 101.313356 = $104.13

Therefore current price of Platinum Water Media stock is $104.13