I would appreciate if someone could help me on this problem. 90. The following data pertains to a company’s common stock: - No dividends for the first 2 years - Dividend 3 years from now in 1. - Dividends are expected to grow at a 7% rate from that point onward. If an investor requires 17% return on his investment, how much will the investor be willing to pay for this stock now? A) 6.24 B) 7.31 C) 8.26 D) $10.00 I got B) 7.31 but the answer is C). Can someone explain how to get to C? Thanks
I agree that the answer is $7.31. The value of the perpetuity is $10, and that value is stated as of two years from now. Discounting the $10 by 17% for two years yields $7.31.
Fv= 10, I/y=17, N=2 PV=? P2= D3/ K-G 1/17-7
Thanks guys… Appreciate your responses
I’m also getting B. I’d like to hear some additional input on this.
Time line = $0 now; $0 in year 1; $0 in year 2; $1 in year 3. Note that the price is always one year before the dividend date. Solve for the PV of $10 to be received in two years. FV = 10; N = 2; I/Y = 17; CPT ¨ PV = $7.31. That is from schweser online. The answer is B…even the book has the answer as B. You might be looking at the wrong answer page…
yeh i got B, and the answers say B aswell…