Question

Keidis Industries will pay a dividend of $5.15, $6.25, and $7.45 per share for each of the next three years, respectively. In four years, you believe that the company will be acquired for $69.00 per share. The return on similar stocks is 11.4 percent. What is the current stock price?

Answer 1

Current value of share is present value of all cash flows or dividends expected for a stock in future.

$P_0 = \frac{Div_1}{(1 + r)^1} + \frac{Div_2}{(1 + r)^2} + \frac{Div_3}{(1 + r)^3} + \frac{CF_4}{(1 + r)^4}$

$P_0 = \frac{5.15}{(1 + 0.114)^1} + \frac{6.25}{(1 + 0.114)^2} + \frac{7.45}{(1 + 0.114)^3} + \frac{69}{(1 + 0.114)^4}$