Question

Suppose MBI Co. is expected to pay a $0.60 dividend per share next year. Wall Street analysts project the stock will sell for $35.75 in one year. You have been earning 11.5% on your other investments and you believe this one should give you the same return. What is the most you can pay for MBI today in order for you to earn your required return?

Answer 1

Answer:

$32.60

Explanation:

Data provided in the question:

Dividend paid per share = $0.60

Market price per share = $35.75

Required returns, r = 11.5% = 0.115

Now,

Current price = [ Dividend paid per share + Market price per share ] ÷ ( 1 + r )

= [ $0.60 + $35.75 ] ÷ ( 1 + 0.115 )

= $36.35 ÷ 1.115

= $32.60