You plan on purchasing the stock of Red Cigars Inc. and you expect it to pay a dividend of $3.15 in 1 year, $3.55 in 2 years, and $4.05 in 3 years. You expect to sell the stock for $95.00 in 3 years. If your required return for purchasing the stock is 11 percent, how much would you pay for the stock today?

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10 February, 09:58

You plan on purchasing the stock of Red Cigars Inc. and you expect it to pay a dividend of $3.15 in 1 year, $3.55 in 2 years, and $4.05 in 3 years. You expect to sell the stock for $95.00 in 3 years. If your required return for purchasing the stock is 11 percent, how much would you pay for the stock today?

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Hana Ellison · Answer 1

Price of stock = $78.143

Explanation:

According to the dividend valuation model, the current price of a stock is the present value of the expected future dividends discounted at the required rate of return.

So we will discount the steams of dividend using the required rate of 11.0% as follows

Price of stock = 3.15 * 1.11^ (-1) + 3.55 * 1.11^ (-2) + 4.05 1.11^ (3) + 95 * 1.11^ (-3)

=78.143

Price of stock = $78.143