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Question of the Week - Equity

AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
edited September 2015 in Level 1 Questions
A stock priced at £35.73 is projected to pay dividends of £1.50, £2.00, and £2.50 at the end of the next three years. At the time of the third dividend, the stock is expected to be worth £36.23. If the required rate of return for this stock is 10%, the intrinsic value of the stock is closest to:
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Question of the Week - Equity 16 votes

£32
87%
ZeeartyeaselAdaptPreprsparksStuj79YannickTtcfaJacQuiMsridharcwkevtivRichie321TheClawclangerhscarebaer 14 votes
£34
6%
ArsenalFan 1 vote
£36
6%
jennahomes 1 vote

Comments

  • AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
    £32

    The intrinsic value of the stock is equal to the present value of its cash flows.

    Year 1 CF: £1.50 dividend

    Year 2 CF: £2.00 dividend

    Year 3 CF: £2.50 dividend + £36.23 terminal value (£38.73 total)


    The present value of these payments at 10% is:

    PV = 1.50 / 1.1 + 2.00 / 1.1^2 + 38.73 / 1.1^3 = 32.11

    PassedTense
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