Question

GM is currently trading at $42.39 and is expected to pay a dividend of $1.52 next year. Yahoo! Finance reports a 1-yr estimated price of $47.48. If you believed those estimates and require a return of 14%, would you buy GM’s stock?

Answer 1

Solution :

Statement showing calculation of maximum price payable for a stock

Sl.No.	Particulars	Period	Cash Flow	Annuity Factor @ 14 %	Discounted Cash Flow
1	Expected Dividend next year	1	$ 1.52	0.877913	$ 41.64912
2	Expected Maturity Amount next year	1	$ 42.39	0.877913	$ 1.333333
3	Maximum price of the Stock = ( $ 41.64912 + $ 1.333333 )				$ 42.982460
4	Maximum price of the Stock ( when rounded off to two decimal places)				$ 42.98

Since the maximum price payable for a stock is $ 42.98 which is less than the current trading price of $ 42.39, GM’s stock can be purchased.