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

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