Question

A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments?A) $30.24B) $26.30C) $26.09D) $27.74

Answer 1

To find the investor's valuation of a stock, we calculate the present values of the expected dividends and future selling price given a 15% required return. After separate present value calculations for the dividends and selling price, these values are summed, resulting in an investor's valuation of $26.30 for the stock.

Step-by-step explanation:

To determine an investor's valuation of a stock that currently sells for $25 per share, pays $0.24 per year in dividends, is expected to sell for $30 in one year, and requires a 15 percent return on equity investments, we must calculate the present value of the stock's future price and the expected dividends.

The present value (PV) of the dividends received in one year is calculated using the formula:

PV = Dividends / (1 + required return)

For the dividends:

PV = $0.24 / (1 + 0.15) = $0.2087

Next, calculate the present value of the selling price in one year:

PV = Expected future price / (1 + required return)

For the selling price:

PV = $30 / (1 + 0.15) = $26.087

Now, we add the present value of dividends to the present value of the expected selling price:

Investor's valuation = $0.2087 + $26.087 = $26.30.

Therefore, the correct answer is B) $26.30.

Answer 2

B) $26.30

Step-by-step explanation:

To determine an investor's valuation of the stock we must calculate the present value of next year's dividend and selling price:

present value = [dividend / (1 + rate)] + [selling price / (1 + rate)]

present value = [$0.24 / (1 + 15%)] + [$30 / (1 + 15%)] = $0.21 + $26.09 = $26.30