10-31-2011, 08:45 PM
Solution
Find out the values for D1, D2 and D3
D1= 4 (1+0.2) =4.8
D2= 4.8 (1+0.2) =5.76
D3=5.76 (1+0.05) =6.11
What will be the price of stock (P2) at the end of year 2?
P2= 5.76 (1+0.2)/ .1-0.05
P2=138.24
What will be the present value (P0) of stock?
PO= 4.8/(1+.1)1 + 5.76/(1+.1)2 + 6.11/(1+.1)3 + 128.31/(1.1)3
= 110
Should we buy stocks of ABC Corporation at Rs. 150
As the present value of the stock is less then the current selling price so the stock should not be purchased.
Find out the values for D1, D2 and D3
D1= 4 (1+0.2) =4.8
D2= 4.8 (1+0.2) =5.76
D3=5.76 (1+0.05) =6.11
What will be the price of stock (P2) at the end of year 2?
P2= 5.76 (1+0.2)/ .1-0.05
P2=138.24
What will be the present value (P0) of stock?
PO= 4.8/(1+.1)1 + 5.76/(1+.1)2 + 6.11/(1+.1)3 + 128.31/(1.1)3
= 110
Should we buy stocks of ABC Corporation at Rs. 150
As the present value of the stock is less then the current selling price so the stock should not be purchased.
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