Question

You have just purchased a share of stock for $ 19.09. The company is expected to pay a dividend of $ 0.51 per share in exactly one year. If you want to earn a 10.8 % return on your​ investment, what price do you need if you expect to sell the share immediately after it pays the​ dividend?

Answer 1

$20.64

Step-by-step explanation:

Use the rate of return formula to solve for the new price;

r = ( P1 +Div1 -P0)/P0

whereby;

r = rate of return = 10.8% or 0.108 as a decimal

Div1 = Next year's dividend amount = $0.51

P1 = next year's stock price =?

P0 = Current stock price = $19.09

Next, plug in the numbers to the formula;

0.108 = (P1 + 0.51 - 19.09) / 19.09

Multiply both sides by 19.09;

2.0617 = P1 -18.58

Add 18.58 on both sides;

2.0617 + 18.58 = P1

20.64 = P1

Therefore, you need to sell the share at $20.64