 # Equity Modeling and Valuation Problem

Hi everybody!

This is my first post in this forum after months of lurking. I need help with the logic behind the following problem:

An investor projects the price of a stock to be \$16.00 in one year and expected the stock to pay a dividend at that time of \$2.00. If the required rate of return on the shares is 11%, what is the current value of the shares?
A) \$15.28.

B) \$16.22.

C) \$14.11.

The value of the shares = (\$16.00 + \$2.00) / (1 + 0.11) = \$16.22

The answer is B. But I would like to know why are we adding the price and the dividend of year 1, and dividing it with the Required Rate of Return plus one. I understand this is a form of discounting, but I am trying to see the formula and/or logic behind this solution. My initial approach was to solve for it using the DDM model, but I am clearly missing the growth rate so that could not work. I do not think I can get the ROE (by using Dupont) nor the div. payout ratio.

Thank you so much to all the people who can answer 