Q:An analyst projects that a stock will pay a $2 dividend next year and that it will sell for $40 at year-end.If the required rate of return is 15%,what is the value of the stock? Answer is $36.52 But I think the dividend shouldn’t be taken in the calculation of the present value.am I right? btw: the question is taken from the Schweser study Notes book4
dividend must be taken in the calculation as this is a long position and the dividend will be paid to you.
But I think the year-end price $40 should alreday contain the dividends’ value,when the dividends paid,the price of the share would suddenly decresed by $2 on the next year
Yes, thats correct. The year-end price does not include the $2 dividend paid out. 2/1.15 + 40/1.15 = 36.52
return = (P1 - P0 + D)/ P0 0.15 = (40 - P0 + 2)/P0 P0 = 36.52173913 - Dinesh S
I remember this question. I guess you have to assume that the $40 is the year end price of the next year, after the dividend has already been paid.
i guess the issue is different interpretation of the question. “it will sell for $40 at year-end” , it means next year -same year with the dividend paid out( I think it is supposed to mean that)
what if the dividends are paid before the end of the year,and the year-end price was still $40.Then what’s the present value of a share?
Ok, I think that would make sense. the question is misleading