Question

An investor plans to buy a common stock and hold it for two years. The investor expects to receive $1.5 in dividend a year and $26 from the sales of the stock at the end of year 2. If the investor wants a 15% return (compound annually), the maximum price the investor should pay for the stock today is roughly:

Answer 1

Answer:

maximum price the investor should pay for the stock today $22

Explanation:

given data

dividend =  $1.5

sales = $26

return = 15 %

solution

we get here Current price that is

Current price = Future dividends × Present value of discounting factor(rate%,time period)   ....................1

that is

= $\frac{1.5}{1.15} + \frac{1.5}{1.15^2} + \frac{26}{1.15^2}$  

= $22