Question

1. Blue Eagle Media stock is expected to pay a dividend of 3 dollars in 2 years. The stock is currently priced at 88.39 dollars, is expected to be priced at 95.35 dollars in 1 year, and is expected to be priced at 103.63 dollars in 2 years. What is the dividend in 1 year expected to be for Blue Eagle Media stock? The stock’s dividend is paid annually and the next dividend is expected in 1 year.

Answer 1

Thw price of a stock is equal to present value of all future cash flows from it.

Price of the stock today = (Price of stock in 1 year + dividend to be received in the year)/(1+return)

Price of stock in year 1 =( price of stock in year 2+dividends in year 2)/(1+return)

Or, 95.35 = (103.63+3)/(1+ return)

Or, return = 11.8301%

Similarly,

Price of stock today =( Price in year 1+Dividend in year 1)/(1+return)

88.39 =( 95.35+dividend in year 1)/(1.118301)

Or, dividend in year 1 = $3.4966

Thus, dividend expected in year 1 is $3.5

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