Question

Suppose Acap Corporation will pay a dividend of $2.72 per
share at the end of this year and $3.07 per share next year. You
expect Acap's stock price to be $50.49 in two years. Assume that
Acap's equity cost of capital is 9.4%.

a. What price would you be willing to pay for a share of Acap
stock today, if you planned to hold the stock for two years?

b. Suppose instead you plan to hold the stock for one year.
For what price would you expect to be able to sell a share of Acap
stock in one year?

c. Given your answer in (b), what price would you be willing
to pay for a share of Acap stock today if you planned to hold the
stock for one year? How does this compare to your answer in
(a)?

a. What price would you be willing to pay for a share of Acap
stock today, if you planned to hold the stock for two years?If you
plan to hold the stock for two years, the price you would pay for a
share of Acap stock today is $_______ (Round to the nearest
cent.)

b. Suppose instead you plan to hold the stock for one year.
For what price would you expect to be able to sell a share of Acap
stock in one year?

The price for which you expect to sell a share of Acap stock
in one year is $__________. (Round to the nearest cent.)

c. Given your answer in (b), what price would you be willing
to pay for a share of Acap stock today if you planned to hold the
stock for one year? How does this compare to your answer in
(a)?

Given your answer in (b), the price you would be willing to
pay for a share of Acap stock today, if you planned to hold the
stock for one year is $______ (Round to the nearest cent?

Answer #1

Dividend in Year 1=D1=$2.72

Dividend in Year 2=D2=$3.07

Price in Year 2=P2=$50.49

R=Cost of Capital=9.4%=0.094

a.Present Value of Dividend of Year1=D1/(1+R)=2.72/1.094=$2.49

Present Value of Dividend of Year2=D2/((1+R)^2)=3.07/(1.094^2)=$2.57

Present Value of Price in Year2=P2/((1+R)^2)=50.49/(1.094^2)=$42.19

Would pay for a share of Acap stock today is =2.49+2.57+42.19=$47.25

b.SELLING PRICE AFTER ONE YEAR:

Present Value of Dividend after one year=3.07/1.094=$2.81

Present Value after one year=50.49/1.094=$46.15

Selling Price after One Year=2.81+46.15=$48.96

c.Price to be willing to pay today=48.96/1.094=$44.75

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