A firm is expected to pay a dividend of 255 next year and 28

A firm is expected to pay a dividend of $2.55 next year and $2.85 the following year. Financial analysts believe the stock will be at their price target of $115 in two years.

Compute the value of this stock with a required return of 11.5 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

A firm is expected to pay a dividend of $2.55 next year and $2.85 the following year. Financial analysts believe the stock will be at their price target of $115 in two years.

Solution

Price of stock is the present value of dividend. In two years, price is estimated to be $ 115.It means at the end of two years, present value of future dividends is $ 115. Step-1:Calculation of present value of dividend of two years Year Dividend Discount factor Present Value a b c=1.115^-a d=b*c 1 $       2.55      0.8969 $       2.29 2 2.85      0.8044           2.29 Total           4.58 Step-2:Present Value of price of at the end of two years Present Value = Price in 2 years x Discount factor =            115 x      0.8044 =         92.50 Total present value of dividend =           4.58 +         92.50 =         97.08 Thus, Value of stock is $ 97.08