A stock's value has two components, the first of which is the share's market price, and the second is the value you expect to receive from the dividends that the stock pays. However, the stock's total value is less than the sum of these values. Money you will receive in the future is worth less to you that same money now. Economists consider future dividends discounted, and the discount's size depends on the current interest rate.
1. Add 1 to the annual interest rate. For example, if the current interest rate is 1 percent, then 0.01 + 1 = 1.01.
2. Raise this answer to the power of the number of years before the first dividend pays. If the first dividend pays after one year: 1.01^1 = 1.01.
3. Divide the first dividend's value by this answer. For example, if you expect each dividend to pay $50, then 50 ÷ 1.01 = $49.50.
4. Repeat the previous steps for all of the remaining expected dividends. If you expect to receive dividends after two, three and four years before selling the stock, then calculate $50 ÷ 1.01^2 = $49.01; $50 ÷ 1.01^3 = $48.53; $50 ÷ 1.01^4 = $48.05.
5. Add the values from Step 4 together: $49.50 + $49.01 + $48.53 + $48.05 = $195.09.
6. Add this sum to the stock price. For example, if the shares sell at $400, then $400 + $195.09 = $595.09. This is the total value of the stock.
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