Question

A stock sells for $6.99 on December 31, providing the seller with a 6% annual return. What was the price of the stock at the beginning of the year? $6.59 $1.16 $7.42 $5.84

Answer 1

Answer:

Correct option is 6.59

Explanation:

Selling price of stock at the end of the year is $6.99. Annual return rate is 6%. Price of stock at the beginning will be present value of stock valued at the end discounted at 6%. Computation is as shown below:

$Present\ value\ or\ price\ of\ stock = Selling\ price\left ( \frac{1}{1+i} \right )^{n}$

$= 6.99\left ( \frac{1}{1+0.06} \right )^{1}$

$= \frac{6.99}{1.06}$

= $6.59

Therefore, Stock's price in the beginning of the year is $6.59.