Question

a share of stock is now selling for $100. it will pay a dividend of $9 per share at the end of the year. its beta is 1. what do investors expect the stock to sell for at the end of the year?

Answer 1

Investors expect the stock to sell for $90 at the end of the year.

Step-by-step explanation:

To determine what investors expect the stock to sell for at the end of the year, we need to consider the concept of the stock's price-earnings (P/E) ratio. The P/E ratio is a valuation metric that measures the price investors are willing to pay for each dollar of earnings generated by the company.

In this case, the stock is expected to pay a dividend of $9 per share at the end of the year. To calculate the expected price at the end of the year, we can use the formula:

Expected Price = Dividend / (Required Rate of Return - Growth Rate)

Since the stock's beta is 1, we can assume the required rate of return is equal to the market rate of return, which is usually around 10%.

Let's plug in the values and calculate:

Expected Price = $9 / (0.1 - 0)

Expected Price = $9 / 0.1

Expected Price = $90

Therefore, investors expect the stock to sell for $90 at the end of the year.

Answer 2

To value a share of Babble, Inc., an investor would sum the expected dividends from immediate profit, one year's profit, and two years' profit, resulting in a total expected per-share dividend payment of $300,000.

Step-by-step explanation:

The value an investor is willing to pay for a share of stock in a company can be determined by considering the expected dividends and any potential capital gains from selling the stock in the future.

For Babble, Inc., a company that plans to dissolve in two years, each of the 200 shares would be expected to receive a dividend of $75,000 immediately ($15 million / 200 shares), an additional dividend of $100,000 one year from now ($20 million / 200 shares), and a final dividend of $125,000 two years from now ($25 million / 200 shares).

Since these profits are paid out as dividends when they occur and no further value is expected after the company's disbandment, an investor may be willing to pay the sum of these dividends as the price for a share of stock.