Question

Suppose you are thinking of purchasing the stock of Moore Oil, Inc. You expect it to pay a $2 dividend in one year, and you require a return of 20% on investments of this risk. In addition to the dividend in one year, you expect a dividend of $2.10 in two years and a stock price of $14.70 at the end of year 2. Now how much would you be willing to pay? (choose the closest one)

Answer 1

The present value to achieve a 20% return will be $ 13.33

Step-by-step explanation:

We are going to discount the cashflow at 20% to know the present value:

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity $2.00

time 1.00

rate 0.20000

`(2)/((1 + 0.2)^(1) ) = PV`

PV 1.6667

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity $16.80

time 2.00

rate 0.20000

`(16.8)/((1 + 0.2)^(2) ) = PV`

PV 11.6667

Total present value: 13.33