Question

8. You are considering an investment in an existing company; the company pays a $3.00 quarterly dividend per share. After three years you believe that you can sell the stock for $100 per share. If you wish to earn a 12% return, how much would you be willing to pay for the stock today? (hint: this is a quarterly dividend, so the discounting period is a quarter, and the quarterly discount rate is the annual rate divided by 4. Set this up in an Excel file for the calculations).

9. For the last question, suppose you hear some information that leads you to believe that the stock is more risky than you first assumed. You still think that your assumption about the value of the stock in three years is the best estimate, but you are concerned that the variance in that estimate is larger than you expected. How might you adjust your calculations to account for the greater risk?

10. You are considering two potential investments. One is an established company with a history of consistent earnings growth, while the other is a new IPO with a short track record. You think that the stock of both companies will be worth $100 in three years. How would a risk-averse investor differ in his or her value calculations for each of the investments?

Answer 1

I can only answer 1 question at a time, so I am answering only question 8.

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