Question

Suppose you are thinking of purchasing the Moore Co common stock today. If you expect Moore to pay $2 dividend at the end of year one and $3 dividend at the end of year two and you believe that you can sell the stock for $87 at that time. If your required return on this investment is 12%, how much will you be willing to pay for the stock

Answer 1

$73.51

Step-by-step explanation:

We can calculate the price of a stock after 2 years we are willing to pay by calculating the present value of cash flows each year by multiplying the cash flow with the present value factor according to the relevant year.

Year Nature Cash flow Pv factor (12%) PV of cash flow

1 Dividend $2 0.893 1.78

2 Dividend $3 0.797 2.391

2 Sale value $87 0.797 69.33

$73.51