Question

Valorous Corporation will pay a dividend of $ 1.75 per share at this​ year's end and a dividend of $ 2.40 per share at the end of next year. It is expected that the price of​ Valorous' stock will be $ 44 per share after two years. If Valorous has an equity cost of capital of 8​%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock​ today?

Answer 1

Calculation of Maximum Price that a prudent investor would be willing to pay for a share of Valorous stock​ today :

Maximum Price = Sum of Present value of Dividend and stock Price .

Below is the table showing Present value of Dividend and stock Price :

Year	Dividend / Price	PVF @8%	Present Value of Dividend/Price
1	1.75	0.925925926	1.62037037
2	2.4	0.85733882	2.057613169
2	44 (Price)	0.85733882	37.72290809
		Total	$41.40089163 or $41.40

Maximum Price that a prudent investor would be willing to pay for a share of Valorous stock​ today is $41.40