 # security valuation

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