Question

• You want to purchase common stock of Company X and hold it for 6 years. The company just announced they will be paying an annual cash dividend of $5.00 per share for the next 8 years. How much should you pay for the stock, if you will be able to sell the stock for $22 at the end of 6 years and you want to earn an annual rate of return of 9% on this investment?

Answer 1

The value of stock is the present value of the expected cash flows discounted at  required rate of return.

Year	Dividend	PVF@9%	Present Value (Cashflow*PVF)
1	5	0.917	4.59
2	5	0.842	4.21
3	5	0.772	3.86
4	5	0.708	3.54
5	5	0.650	3.25
6	27	0.596	16.10

Current share price = Cashflow*PVF

= 4.59+4.21+3.86+3.54+3.25+16.1

= $35.55

You can use the equation (1-(1+r)^-n)/r to find PVF using calculator

Formula to calculate PV in excel is as follows "=PV(interest rate,Year,0,cashflow)"