Wall Street is forecasting yearly dividends for FNC as follows: $1.00 (Year 1); $1.50 (year 2); $2.00 (Year 3); $3.00 (Year 4). The consensus estimate is that FNC shares will trade at $80 in four years. If the required return on the stock is 9%, calculate the value of FNC stock today. Show and submit all your work, then answer the following questions.
19. What is the discount rate you used in your work ?
20. Could the yearly FNC dividends be computed as an annuity ? Why, or why not ?
21. What is the total pv of the four yearly dividends ?
22. What is the pv of the forecasted share price ?
23. What is the total value of FNC today (pv of four dividends plus pv of forecasted share price) ?
The solution discusses yearly FNC dividends be computed as an annuity.