Question

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 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 10% return.

Answer 1

The maximum price you would pay for the stock today is __$30.23___ if you wanted to earn a 10% return

Step-by-step explanation:

The maximum any rational investor would pay for such stock is the present value of the future cash flows that the stock would pay, in other words, the present value of dividend and sale of stock using 10% as the discount rate.

The present value of future cash flows=($1.25+$32)/(1+10%)

The present value of future cash flows=$33.25 /1.10

The present value of future cash flows=$30.23