Question

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

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?

Homework Answers

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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