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9. Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over...

9. Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12%, required return?

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Answer #1

Given,

Required rate of return= 12%

Dividend for year 1 (D1)= $3

Dividend for year 2 (D2)= $3.24

Dividend for year 3 (D3)= $3.50

Price at the end of year 3 (P3)= $94.48

Current price is the present value of dividends and sale price at the end of 3 years, discounted at yth required rate of return.

Price of the stock= D1*(PVIF 12%,1 )+ D2*(PVIF 12%,2) +D3*(PVIF 12%, 3) + P0*(PVIF 12%, 3)

Plugging the values,

Current price= 3*0.8929 + 3.24*0.7972 + 3.50*0.7118 + 94.48*0.7118

=$2.68 + $2.58 + $2.49 + $67.25 = $75.00

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