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Darrens Holdings is expected to pay dividends of $1.00 every six months for the next three...

Darrens Holdings is expected to pay dividends of $1.00 every six months for the next three years. If the current price of Darrens stock is $22.70​, and​ Darrens's equity cost of capital is 18​%, what price would you expect​ Darrens's stock to sell for at the end of three​ years?

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Answer #1

Current Price = PV of CFs from it.

Let X be the Price at Year 3.

Period CF PVF @9% Disc CF
1 $      1.00     0.9174 $ 0.9174
2 $      1.00     0.8417 $ 0.8417
3 $      1.00     0.7722 $ 0.7722
4 $      1.00     0.7084 $ 0.7084
5 $      1.00     0.6499 $ 0.6499
6 $      1.00     0.5963 $ 0.5963
6 X     0.5963 0.5963X
Price Today 4.4859+0.5963X

Thus 4.4859 + 0.5963X = 22.70

0.5963X = 22.70 - 4.4859

= 18.2141

X = 18.2141 / 0.5963

= 30.55

Price after 3 years is $ 30.55

Pls do rate, if the answer is correct and comment, if any further assistance is required.

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