Question

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is ________ if you wanted to earn a 15% return. Group of answer choices $24.11 $27.50 $23.91 $26.52 None of the options are correct.

Answer 1

$26.52

Step-by-step explanation:

The computation of the maximum price for paying for the stock today is shown below:

As we know that

Required rate of return = (Sale of the stock - maximum price + dividend received) ÷ (maximum price)

0.15 = ($28 - maximum price + $2.50) ÷ (maximum price)

0.15 × maximum price = $28 - maximum price + $2.50

So, the maximum price is $26.52

We simply applied the above formula