Keidis Industries will pay a dividend of $4.85, $5.95, and $7.15 per share for each of the next three years, respectively. In four years, you believe that the company will be acquired for $66.00 per share. The return on similar stocks is 10.6 percent. What is the current stock price?
Question
Keidis Industries will pay a dividend of 5.95, and 66.00 per share. The return on similar stocks is 10.6 percent. What is the current stock price?
Solution
To calculate the current stock price, we need to find the present value of the future dividends and the acquisition price. We will discount these future cash flows back to the present using the given return rate of 10.6 percent.
Here are the steps:
-
Calculate the present value of the dividends:
- For the first year: 4.38
- For the second year: 4.85
- For the third year: 5.32
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Calculate the present value of the acquisition price:
- For the fourth year: 48.66
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Add up these present values to get the current stock price:
- 4.85 + 48.66 = $63.21
So, the current stock price should be approximately $63.21.
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