What would be the present value of XYZ company stock if it is expected to pay a $5.50 dividend and have a future price of $120 with a required rate of return of 15%?

To find the present value of XYZ company stock, you need to calculate the present value of the expected future cash flows, which include the dividend and the future selling price of the stock. The formula to calculate the present value (PV) of these cash flows is as follows:

[ PV = \frac{D}{(1 + r)} + \frac{P}{(1 + r)} ]

Where:

• ( D ) is the expected dividend ($5.50),
• ( P ) is the expected selling price ($120),
• ( r ) is the required rate of return (15% or 0.15).

Now, you can calculate it step by step:

1. Calculate the present value of the dividend: [ PV_{dividend} = \frac{5.50}{(1 + 0.15)} = \frac{5.50}{1.15} \approx 4.78 ]

2. Calculate the present value of the future price: [ PV_{price} = \frac{120}{(1 + 0.15)} = \frac{120}{1.15} \approx 104.35 ]

3. Now, add both