Question

Janet is planning to purchase the stock of Mortensen Petro, Inc. She expects the stock to pay a $1.98 dividend next year, and she would sell the stock for $28 next year. If the required return of the stock is 12.5%, what is the (highest) price that she is willing to pay for the stock today?

Answer 1

Answer: Current Price $26.65

Explanation:

Rate of return = 12.5%

dividends = $1.98

Expected Price (in a year from now) Pe= $28

Current price = Pc

R = (Pe - Pc + D)/Pa

0.1250 = (28 - Pc + 1.98)/Pc

28 - Pc + 1.98 = 0.1250Pc

-Pc - 0.1250Pc = - 28 - 1.98

- 1.125Pc = -29.98

 Pc = -29.98/(-1.1250Pc) = 26.64888889

 Pc = $ 26.65