Question

Planned Obsolescence has a product that will be in vogue for 3 years, at which point the firm will close up shop and liquidate the assets. As a result, forecast dividends are DIV1=$3.00 DIV 1 = $ 3.00 , DIV2=$3.50 DIV 2 = $ 3.50 , and DIV3=$19.00 DIV 3 = $ 19.00 . What is the stock price if the discount rate is 10%?

Answer 1

Based on the provided information, if the discount rate is 10%, we can use the dividend discount model (DDM) to calculate the stock price. The formula for the DDM is:
Stock Price = DIV1 / (1 + discount rate) + DIV2 / (1 + discount rate)^2 + DIV3 / (1 + discount rate)^3

Plugging in the given values:
Stock Price = 3 / (1 + 0.10) + 3.50 / (1 + 0.10)^2 + 19 / (1 + 0.10)^3

Simplifying the equation will give you the stock price.