Final answer:
An investor will pay the present value of the future cash flows that a stock is expected to generate. In this case, using a discount rate of 10%, the investor would be willing to pay $15.1632 for a share of stock in this company.
Step-by-step explanation:
An investor will pay for a share of stock based on the present value of the future cash flows it is expected to generate. In this case, the stock costs $90 and pays a $4 annual dividend. After five years, the investor can expect to receive 5 dividends of $4 each. To determine the present value of these future cash flows, you need to discount them using an appropriate discount rate. Let's assume a discount rate of 10%. Using the formula:
PV = CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CFn/(1+r)^n
where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of periods.
Plugging in the values:
PV = 4/(1+0.10)^1 + 4/(1+0.10)^2 + 4/(1+0.10)^3 + 4/(1+0.10)^4 + 4/(1+0.10)^5
PV = 3.6364 + 3.3058 + 3.0053 + 2.7321 + 2.4846
PV = $15.1632
Therefore, the investor would be willing to pay $15.1632 for a share of stock in this company.