Question

Valorous Corporation will pay a dividend of $ 1.75 per share at this​ year's end and a dividend of $ 2.35 per share at the end of next year. It is expected that the price of​ Valorous' stock will be $ 40 per share after two years. If Valorous has an equity cost of capital of 8​%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock​ today?

Answer 1

In your calculator press 8 percent times $1.75. $1.75 take away the answer then do 8% times $2.35. 2.35 take away the answer. 8 percent times 40 dollars. 40 dollars take away the answer. You plus the, or take away the 3 answers. That is your answer for the question.

Answer 2

The maximum price that a prudent investor would be willing to pay for a share of Valorous stock​ today is $37.92

Step-by-step explanation:

In order to calculate the maximum price that a prudent investor would be willing to pay for a share of Valorous stock​ today we would have to use the following formula:

Current price=future dividends*present value of discount factor(8%, time period)

Therefore, current price= $40/1.08^2 + $2.35/1.08^2 + $1.75/1.08 =

current price=$34.29+$2,01+$1,62

current price=$37.92

The maximum price that a prudent investor would be willing to pay for a share of Valorous stock​ today is $37.92