Question

A stock will pay a dividend of $3.90 exactly one year from now, and it will continue to pay this same dividend every year thereafter. If the stock's required rate of return is 6.8%, what is a fair price for the stock today? Round your answer to the nearest penny.

Answer 1

To determine the fair price of a stock, we calculate the present value of future dividends using the formula PV = D / R, where PV is the present value, D is the annual dividend, and R is the required rate of return. In this case, the fair price for the stock today would be $57.35.

Step-by-step explanation:

To determine the fair price for the stock today, we need to calculate the present value of the future dividends. The formula to calculate the present value of a perpetuity is PV = D / R, where PV is the present value, D is the annual dividend, and R is the required rate of return.

In this case, the annual dividend is $3.90 and the required rate of return is 6.8%. Plugging these values into the formula, we get PV = $3.90 / 0.068 = $57.35. Therefore, the fair price for the stock today would be $57.35.