Question

A stock is currently at $112 and pays an annual dividend of $4.75. You expect the stock to generate a 12% return over the next 3 years. What would the price be in 3 years if you are right?

A.)An investment will pay you $450 every month for the next 18 years and $4,500 at the end of 18 years.   if you can earn 7.5% on your money, how much would you be willing to pay for this investment?

Answer 1

1. Price today =Dividend/(1+r)+Dividend/(1+r)^2+dividend/(1+r)^3+Price in year 3/(1+r)^3
Price in year 3 =Price today*(1+r)^3-Dividend(1+r)^2-Dividend*(1+r)^1+Dividend
Price in year 3 =112*(1+12%)^2-4.75*(1+12%)^2-4.75*(1+12%)-4.75 =124.46

2. Number of Months =18*12 =216
Rate per month =7.5%/12
Amount at the end of 18 years =4500
Amount willing to pay for this investment =PMT*((1-(1+r)^-n)/r)+FV/(1+r)^n
=450*((1-(1+7.5%/12)^-216)/(7.5%/12))+4500/(1+7.5%/12)^216 =54427.61