Homework Answers
Answer = $ 46.50
Note:
Price = Present Value of Dividends +Present Value of Price at Year 2
= $ 12.84392500608720 + $ 33.65845973159170
= $ 46.50
1. Present Value of Dividends:
| Year | Dividend | Discounting Factor(11%) | Present Value |
| 0 | 7.50 | ||
| 1 | 7.50 | 0.900900900900901 | 6.75675675675676 |
| 2 | 7.50 | 0.811622433244055 | 6.08716824933041 |
| Present Value of Dividends | 12.84392500608720 |
2. Price at Year 2 = Expected Dividend / (Required return -growth rate)
= [$ 7.50 * (100%-6%) ] / [11%-(-6%)]
= 7.05/17%
=$ 41.47058824
Present value of Price at Year 2 = Price at Year 2 * Present Value of discounting factor(rate,time)
=$ 41.47058824* 0.811622433244055
= $ 33.65845973159170
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