As in the case of bonds, you know that the value of a share of common stock is the present value of all the expected future cash flows that are associated with the bond. Unlike bonds, however, common stocks do not have a finite life (fixed number of periods to maturity). As such, the amount and timing of all future cash flows are not known with a high degree of certainty. In order to estimate the fair market value of a share of common stock at a particular point in time, therefore, you need to form expectations about the magnitude, timing and risk of these future cash flows. Once you have formed your expectations, you can calculate the present value of the cash flows as an estimate of the stocks current fair market value. Rework the previous question under the realization that you do not know the appropriate discount rate with certainty. You believe, however, that the appropriate discount rate should be between 9 percent and 13 percent per year. Introducing this degree of uncertainty leads you to believe that a fair market value per share for McPherson Enterprises lies in the range of

This is the previous question:

McPherson Enterprises is expected to pay a dividend (cash flow to investors) of $2.25 per share at the end of the year (i.e. the dividend at t =1 is expected to be $2.25). Investors also expect the company to pay the same dividend at the end of each of the following 2 years (at t = 2 and t = 3) and will then increase the dividend to $3.00 for the subsequent 2 years (at t =4 and t = 5). At t = 6 investors further expect that the dividend will increase and grow at a constant rate of 5 percent forever (hint: D6 = D5 x 1.05). The market further believes that the appropriate discount rate for these expected future cash flows (the required return on the companys common stock) is 11 percent per year. Estimate the current market price for a share of stock.