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The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17 percent rate of return?
A.$2.83
B. $2.43
C. $2.56
D. $2.60
E. $2.60.

Respuesta :

mltn1980

Answer:

The answer it's $2,38, it would be Option A, because I think the number is wrong is not 2,83 if not 2,38.

Explanation:

To know the value of the stock we have to find the Present value of each dividend today, it will be :

The formula to applied it's:

Principal Present Value  =  CF /  (1 + r)^t  

Y1: $1,20 / (1+0,17) = $1,03

Y2: $1,00 / (1+0,17)^2 = $0,73

Y2: $1,00 / (1+0,17)^3 = $0,62

Present Value of Stock: $2,38

  1    2       3       Year

$ 1,20 $ 1,00 $ 1,00 Dividend

  17% 17%   17%   Rate of Return

  1,03 0,73   0,62 Present Value  = $2,38

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