Question

The next three annual dividends paid by XYZ stock are expected to be $7.43 in one year, $2.79 in two years, and $3.05 in three years. The price of the stock is expected to be $45.78 in two years. The expected annual return for the stock is 15.20 percent. What is the current price of one share of XYZ stock?

Answer 1

Expected Dividend in year 1(D1) = $7.43

Expected Dividend in year 2(D2) = $2.79

Expected Dividend in year 3(D3) = $3.05

Price in Stock in year 2(P2) = $45.78

Expected annual return for the stock (ke)= 15.20%

calculating the Current price of Stock:-

P0 = $6.450 + $2.102 + $34.496

P0 = $43.05

So, the current price of one share of XYZ stock is $43.05

Note- Dividend in year 3 is included in the price of stock in year 2, thats why it is not taken.

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