Common Stock Valuation: Calculation and Analysis

Value of Common Stock

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Question

Given that an individual owns a common stock with a required rate of return of 15%, on which he expects to receive a dividend of $5 after one year, after which time he will immediately sell it for an expected price of $30, what is the value of the common stock to the individual?

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A. B. C. D. E.

B

According to the dividend discount model with a finite horizon, the value of a common stock to the owner is the present value of the future dividends that he will receive, and the present value of the price for which he will sell the stock. In this question, the value of the stock will be 5/1.15 + 30/1.15 = $30.43

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