Question

how much would you pay for a share of stock today if you expect it will pay a dividend of $2.5 and will sell for $58 one year from now? Assume your required rate of return on this stock is 13 percent. please give step by step solutions

		55.5
		60.5
		53.5
		49.5

Answer 1

Sol:

Stock selling price (Sp) = $58

Expected dividend (D) = $2.5

Required rate of return (r) = 13%

To determine how much to pay for the stock today, will be the present value of the future cash flows discounted at required rate of return:

Stock price today = Sp / (1 + r) + D / 1 + r)

Stock price today = 58 / (1 + 13%) + 2.5 / (1 + 13%)

Stock price today = (58 / (1 + 0.13) + 2.5 / (1 + 0.13)

Stock price today = (58 / 1.13) + (2.5 / 1.13)

Stock price today = 51.33 + 2.21 = $53.5

Therefore amount to be paid for stock today will be $53.5