Afinancial analyst expects crane service inc. to pay a dividend of $2 per share one year from today, a dividend of $3 per share in years two, and estimates the value of the stock at the end of year two to be $22. if your required return on crane service stock is 14 %, what is the most you would be willing to pay for the stock today if you plan to sell the stock in two years?

$20.99

Explanation:

To calculate the present stock value we can use the following formula:

present stock value = (dividend 1 / (1 + r)) + (dividend 2 / (1 + r)²) + (future stock value / (1 + r)²)

= ($2 / (1 + 14%)) + ($3 / (1 + 14%)²) + (22 / ($1 + 14%)²) = ($2 / 1.14) + ($3 / 1.2996) + ($22 / 1.2996) = $1.75 + $2.31 + $16.93 = $20.99

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