Which of the following values is closest to the amount that should be paid for a stock that will pay a dividend of $10 one year from now and $11 two years from now? The stock will be sold in 2 years for an estimated price of $120. The appropriate discount rate is 9%.
A) $114.
B) $119.
C) $124.
D) $129.
E) $138.

Question

Quizplus · Accepted Answer

To find the present value of the stock, calculate the present value of each cash flow and sum them up. The present value of the $10 dividend is $10 / (1.09)^1 = $9.17. The present value of the $11 dividend is $11 / (1.09)^2 = $9.26. The present value of the $120 sale price is $120 / (1.09)^2 = $101.01. Adding these gives $9.17 + $9.26 + $101.01 = $119.44, which is closest to $119.

Which of the Following Values Is Closest to the Amount