Question

Suppose you are thinking of purchasing the stock of Moore Oil, Inc. You expect it to pay a $2.2 dividend in one year, and you require a return of 10% on investments of this risk. In addition to the dividend in one year, you expect a dividend of $2.40 in two years and a stock price of $14.60 at the end of year 2. Now how much would you be willing to pay?

a. $15
b. $14
c. $10
d. $11
e. $12
f. $13
g. $16
h. $17
i. $18

Answer 1

$16 ( g )

Step-by-step explanation:

Dividend expected after 1st year = $2.2

required return on investment =10%

dividend expected in 2 years = $2.4

stock price at the end of 2 years = $14.60

discount factor = 1.1 since required return on investment = 10%

To calculate the value of the stock

value of stock =
`(dividend)/(discount factor) + (dividend after 2years + value of stock after 2 years)/(discount factor^(2) )`

value of stock =
`(2.2)/(1.1) + (14.6 + 2.4)/(1.1^(2) )`

= 2 + 14.049

= $16.05

Answer 2

Correct option is G

Step-by-step explanation:

Since required return on investment =10%

Thus discount factor = 1.1

Present value of stock = 2.2/1.1 + (14.6 + 2.4)/1.1^2

= $16.04