Deluxe Company expects to pay a dividend of $2 per share at the end of year 1, $3 per share at the end of year 2, and then be sold for $32 per share at the end of year 2. If the required rate of return on the stock is 15 percent, what is the current market value of the stock?

The current price of the stock is $28.20

Explanation:

The stock rate of return is 15% this includes both, the dividends and capital gains. Therefore, we should discount our expected cash flow at the required return rate:

Year 1:

2 / (1 + 0.15) = 2 / 1.15 = 1.73913

Year 2:

(3 dividends + 32 stock) / 1.15^2 = 35 / 1.3225 = 26.4650

Then we add both discounted cash flow:

1.73913 + 26.4650 = 28.20413