Question

Suppose Husqvarna AB will pay a dividend of 3.0 kr per share at the end of this year and 3 kr per share next year. You expect Husqvarna’s stock price to be 56 kr in two years. If Husqvarna’s equity cost of capital is 10%:

1. What price would you be willing to pay for a share of Husqvarna stock today, if you planned to hold the stock for two years?

The price is ???? kr. (round to two decimals)

2. Suppose instead you plan to hold the stock for one year. What price would you expect to be able to sell a share of Husqvarna stock for in one year?

The price is ???? kr. (round to two decimals)

3. Given your answer in part (b), what price would you be willing to pay for a share of Husqvarna stock today, if you planned to hold the stock for one year?

The price is ???? kr. (round to two decimals)

Answer 1

Answer 1.

Dividend in Year 1, D1 = 3.00
Dividend in Year 2, D2 = 3.00
Price in Year 2, P2 = 56.00
Cost of Capital, k = 10%

Current Stock Price, P0 = D1/(1+k) + D2/(1+k)^2 + P2/(1+k)^2
Current Stock Price, P0 = 3.00/1.10 + 3.00/1.10^2 + 56.00/1.10^2
Current Stock Price, P0 = 51.49

Answer 2.

Price in Year 1, P1 = D2/(1+k) + P2/(1+k)
Price in Year 1, P1 = 3.00/1.10 + 56.00/1.10
Price in Year 1, P1 = 53.64

Answer 3.

Current Stock Price, P0 = D1/(1+k) + P1/(1+k)
Current Stock Price, P0 = 3.00/1.10 + 53.64/1.10
Current Stock Price, P0 = 51.49