Question

Suppose you are thinking of purchasing the stock of Moore Oil, Inc. You expect it to pay a $2 dividend in one year, and you require a return of 20% on investments of this risk. In addition to the dividend in one year, you expect a dividend of $2.10 in two years and a stock price of $14.70 at the end of year 2. Now how much would you be willing to pay? (choose the closest one)

Answer 1

Answer:

The present value to achieve a 20% return will be $ 13.33

Explanation:

We are going to discount the cashflow at 20% to know the present value:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $2.00

time  1.00

rate  0.20000

$\frac{2}{(1 + 0.2)^{1} } = PV$  

PV   1.6667

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $16.80

time  2.00

rate  0.20000

$\frac{16.8}{(1 + 0.2)^{2} } = PV$  

PV   11.6667

Total present value: 13.33