The Crescent Corporation just paid a dividend of $2 per share and is expected to continue paying the same amount each year for the next 4 years. If you have a required rate of return of 13%, plan to hold the stock for 4 years, and are confident that it will sell for $30 at the end of 4 years, how much should you offer to buy it at today?
Part C: Use the information in the following table to answer the questions below
To calculate the present value of future cash flows using the required rate of return, you can use the formula for the present value of a growing perpetuity:
PV = D / (r - g)
Where PV is the present value, D is the dividend payment, r is the required rate of return, and g is the growth rate of the dividend.
In this case, the dividend payment is $2 per share, the required rate of return is 13%, and the growth rate of the dividend is assumed to be zero since the dividend is expected to remain constant. Therefore, the formula simplifies to:
PV = D / r
PV = $2 / 0.13
PV = $15.38
So the present value of each share is $15.38.
To calculate the total value of your investment at the end of 4 years, you need to consider the present value of the dividends for 4 years and the selling price of the stock at the end of 4 years.
Total value = (PV x number of shares) + (selling price x number of shares)
Total value = ($15.38 x 1) + ($30 x 1)
Total value = $15.38 + $30
Total value = $45.38
Therefore, to determine how much you should offer to buy the stock today, you need to discount the total value at the required rate of return for 4 years.
Offer price = Total value / (1 + r)^n
Where n is the number of years.
Offer price = $45.38 / (1 + 0.13)^4
Offer price = $45.38 / (1.13)^4
Offer price = $45.38 / 1.601
Offer price = $28.36
So you should offer to buy the stock at today's price of $28.36.