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A Corporation will pay a dividend of $1.75 per share at this year's end and a...

A Corporation will pay a dividend of $1.75 per share at this year's end and a dividend of $2.25 per share at the end of next year. It is expected that the price of its stock will be $42 per share after two years. If the firm has an equity cost of capital of 9%, what is the maximum price that a prudent investor would be willing to pay for a share of the stock today? Do not include a dollar sign.

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Answer #1

What is the maximum price that a prudent investor would be willing to pay for a share of the stock today? Do not include a dollar sign.

Answer: 35.9310

Workings

Maximum price that a prudent investor would be willing to pay for a share of the stock today, will be the present value of future dividends and stock price at the end of year 2. Formula for calculating the present value is as follows;

Where,

R = required rate of return = 9% given in problem.

N = number of years

Present value of future cash flows calculation

Maximum price that a prudent investor would be willing to pay for a share of the stock today = 35.9310

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