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over the next two years, YXZ will oay a divudend of $2.00 ans $2.75 in years...

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Finance

over the next two years, YXZ will oay a divudend of $2.00 ans $2.75in years 1 and 2, respectively,. thereafter, dividends will grow ata rate 2% peruear. what is the current value of the firms stockassuming a required rate of return of 15%?
$19.81
$20.13
$20.42
$21.38

Answer & Explanation Solved by verified expert
4.0 Ratings (447 Votes)

$20.13

As per dividend discount model, current value of stock is present value of dividend.
Step-1:Present value of dividend of next two years
Year Dividend Discount factor Present value
1 $       2.00 0.869565 $       1.74
2 $       2.75 0.756144 $       2.08
Total $       3.82
Working:
Discount factor of :
Year 1 1.15^-1 = 0.869565
Year 2 1.15^-2 = 0.756144
Step-2:Present value of dividend of year 3 onwards
Present value = D2*(1+g)/(K-g)*DF2 Where,
= 2.75*(1+0.02)/(0.15-0.02)*0.756144 D2 Year 2 dividend $       2.75
= $    16.32 g Growth rate 2%
K Required return 15%
DF2 Discount factor of year 2 0.756144
Step-3:Value of stock
Value of stock = Present value of dividends
= $       3.82 + $    16.32
= $    20.13

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over the next two years, YXZ will oay a divudend of $2.00 ans $2.75in years 1 and 2, respectively,. thereafter, dividends will grow ata rate 2% peruear. what is the current value of the firms stockassuming a required rate of return of 15%?$19.81$20.13$20.42$21.38

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