Question

5. An investor bought shares of stock at time 0, received annual dividends (the last one has not been received, but is expected), and is thinking of selling them at time 5 (after receiving the dividend). If the investor’s time value of money is shown by the MARR value, what selling price, per share, does the investor expect?

Share purchase price 38.00

Time Dividends received (or expected)      dividend Investor's MARR 0.16

1 4.00

2 4.20

3 4.00

4 3.80

5 5.00

Answer 1

The selling price should be such amount that the present value of the Dividends and the selling price, discounted at MARR 16% will be $38.

Let the selling price be ''A.''

Time	Cash flow	PVF@16%		Present value of cash flow (Cash flow*PVF)
1	4	0.8621	=1/(1.16)^1	3.4483
2	4.2	0.7432	=1/(1.16)^2	3.1213
3	4	0.6407	=1/(1.16)^3	2.5626
4	3.8	0.5523	=1/(1.16)^4	2.0987
5	5	0.4761	=1/(1.16)^5	2.3806
5	A	0.4761	=1/(1.16)^5	0.4761A
			Total PV	13.6115+0.4761A

Hence 13.6115+0.4761A should be equal with the curreent share purchase price $38

=>13.6115+0.4761A = 38

=>A = $51.22

Hence the expected selling price at the end of 5th year is $51.22