Question

A stock will pay a​ $2 dividend next​ year, $2.25 the year​ after, and​ $2.50 the following year. An investor believes that she can then sell the stock for​ $50 at the end of a​ 3-year holding period. The​ risk-free rate of interest is​ 7%, the market return is​ 13%, and the​ stock’s beta is 1. What is the value of the​ stock?

A.

​$49.86

B.

​$39.92

C.

​$37.44

D.

​$47.99

E.

​$35.76

Answer 1

P(t) = (D(t+1) + P(t+1)) / (1+r)

where, P(t) = price of stock at end of year t

P(t+1) = price of stock at end of year t+1

D(t+1) = dividend at end of year t+1

r is expected return on the stock

P(3) = $50

Asn is (B) $39.92

Formula: