You want to invest in a stock that pays $4.00 annual cash dividends for the next three years. at the end of the three years, you will sell the stock for $35.00. if you want to earn 9% on this investment, what is a fair price for this stock if you buy it today?

Po = D1/1+ke + D2/(1+ke)2 + D3+P3/(1+ke)3

Po = 4/1+0.09 + 4/(1+0.09)2 + 4+35/(1+0.09)3

Po = 4/1.09 + 4/(1.09)2 + 39/(1+0.09)3

Po = 3.6697 + 3.6667 + 30.1158

Po = $37.45

Explanation:

The fair price is a function of future dividends capitalised at the appropriate cost of equity of the firm. Moreso, the market price of year 3 is added to the dividend in year 3 before discounting.

the correct answer is:

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