A firm is expected to pay a dividend of $3.95 next year and $4.25 the following year. Financial...

Question

A firm is expected to pay a dividend of $3.95 next year and $4.25 the following year. Financial analysts believe the stock will be at their price target of $120 in two years.

Compute the value of this stock with a required return of 13.9 percent.

David · Accepted Answer

Based on the given information, 
Dividend at end of year 1 = $ 3.95 
Dividend at end of year 2 = $ 4.25 
Price of the stock at the end of year 2 = 120 
Required return on stock = 13.9% 
Hence, current stock price = (3.95/1.139)+ (4.25/1.139
2
) + (120/1.139
2
) = $ 99.24

A firm is expected to pay a dividend of $3.95 next year and $4.25 the following year. Financial analysts believe the stock will be at their price target of $120 in two years. Compute the value of this...

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