Question

A company will pay out $2, $4, $6 for the next three years, respectively. Thereafter, the...

A company will pay out $2, $4, $6 for the next three years, respectively. Thereafter, the firm will never pay any more dividends. What should be the price of a share today if the required rate of return for the stock is 20%?

A.$7.92
B.$12.00
C.$7.14
D.$6.60

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Answer #1
Stock
Discount rate 0.2
Year 0 1 2 3
Cash flow stream 0 2 4 6
Discounting factor 1 1.2 1.44 1.728
Discounted cash flows project 0 1.666667 2.777778 3.472222
NPV = Sum of discounted cash flows
NPV Stock = 7.92
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
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