You are planning to purchase the stock of ted's sheds inc. and you expect it to pay a dividend of $3 in year 1, $4.25 in year 2 and $6.00 in year 3. you expect to sell the stock for $100 in year 3. if your required return for purchasing the stock is 12%, how much would you pay for the stock today?

I would pay up to 81.52 dollars for the share that way I will get a 12% return at least

Explanation:

We need to calcualte the present value of the cash flow of each year using the formula for present value of a lump sum:

      Dividends  Present Value

1st year     3.002.678571429 *1

2nd year     4.253.38807398  *2

3rd year106.00*75.44870627 *3

Value of the share  at 12% discount rate 81.51535168

*100 dollars from the sale plus 6 dollars of dividends

*1

Div: 3.00

time: 1

rate: 0.12

PV  2.678571429

*2

Dividends 4.25

time  2.00

rate  0.12000

PV   3.3881

*3

Maturity  106.00

time  3.00

rate  0.12000

PV   75.4487