Question

Knightmare, Inc., will pay a dividend of $5.15, $8.05, and$11.25 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of11 percent on the company's stock. What is the current stock price

Answer 1

Current stock price is $ 19.40

Step-by-step explanation:

Dividend year 1, d₁ = $ 5.15

Dividend year 2, d₂ = $ 8.05

Dividend year 3, d₃ = $ 11.25

Required return = 11%

= 100% + 11% = 1.11

Current stock price = ($ 5.15 ÷ 1.11) + ($ 8.05 ÷
`1.11^(2)`) + ($ 11.25 ÷
`1.11^(3)`)

= $ 4.64 + $ 6.53 + $ 8.23

= $ 19.40