Question

You are considering purchasing a share of Cass Inc. stock today for $75.00. You forecast no dividend payment this yr but 2 yrs from today , you expect a $10 dividend. you plan to sell the stock immediately after receiving the dividend. if you want to return of15% on the investment,how much must your forecast of the stock price be two yrs from today?

Answer 1

To calculate the forecasted stock price two years from now, use the formula for the present value of a stock with dividends. In this case, with no dividends in the first year and a $10 dividend in the second year, and a desired return of 15%, the forecasted stock price two years from now should be $100.

Step-by-step explanation:

To calculate the forecasted stock price two years from now, we need to use the formula for the present value of a stock with dividends. The formula is: Stock Price = Dividend / (Discount Rate - Dividend Growth Rate). In this case, since there are no dividends in the first year and a $10 dividend in the second year, the dividend growth rate is $10 / $75 = 0.1333. With a desired return of 15%, the discount rate is 0.15.

Plugging in the values, we get: Stock Price = $10 / (0.15 - 0.1333) = $100. Therefore, your forecast for the stock price two years from now should be $100.