Question

Analysts are forecasting LifeTech Corporation's common stock price to be $120 at the end of one year. Also, LifeTech will pay a dividend of $2.60 one year from now. You plan to buy the stock now and sell at the end of one year. If you require a 13% return, what would you be willing to pay to buy the stock now

Answer 1

Price to pay now for the stock = $96.278

Explanation:

The price of the stock would be the present value(PV) of the future cash flow expected from it discounted at the required rate of 13%

Hence we would add the present value of he dividend and the resent of he price at the end of the period

PV = CF × (1+r)^(-n)

CF- Cash Flow

R- rate of return- 13%

n- number of years

PV of dividend = 2.60 × (1.13)^(-1) = 2.30

PV of stock price after a year = 120× (1.13)^(-1) = 93.97

Price to pay now for the stock = 2.30 + 93.97 = $96.278

Price to pay now for the stock = $96.278