Question

Suppose Acap Corporation will pay a dividend of $2.88 per share at the end of this year and $3.01 per share next year. You expect​ Acap's stock price to be $53.87 in two years. Assume that​ Acap's equity cost of capital is 10.3%. a. What price would you be willing to pay for a share of Acap stock​ today, if you planned to hold the stock for two​ years? b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one​ year? c. Given your answer in ​(b​), what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one​ year? How does this compare to your answer in ​(a​)?

Answer 1

Answer:

A.P(0)=$48.89

B.P(1)=$51.56

C.P(0)=$49.35

Explanation:

A. Calculation for what price would you be willing to pay for a share of Acap stock​ today if you planned to hold the stock for two year

Using this formula

P(0)=Dividend per share/Percentage of Equity cost of capital +(Dividend next year+Stock price)/Percentage of Equity cost of capital

Let plug in the formula

P(0) = 2.88/ 1.103 + (3.01+ 53.87) / 1.103^2=

P(0)=2.611+56.88/1.216609

P(0)=59.491/1.216609

P(0)=$48.89

b. Calculation for what price would you expect to be able to sell a share of Acap stock in one​ year

Using this formula

P(1)=(Dividend next year + Stock price)/Percentage of Equity cost of capital

Let plug in the formula

P(1) = (3.01 + 53.87) / 1.103 = $50.00

P(1)=56.88/1.103

P(1)=$51.56

c.Calculation for what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one​ year

Using this formula

P(0)=(Dividend per share + P(1)/Percentage of Equity cost of capital

Let plug in the formula

P(0) = (2.88 + 51.56) / 1.103

P(0)=54.44/1.103

P(0)=$49.35

Therefore compare to the answer in ​(a​)

if you planned to hold the stock for two year you will have $48.89 and if you planned to hold the stock for one​ year you will have $49.35.