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Irina-Kira [14]
3 years ago
13

An investor is considering investing in a stock they plan to hold for 2 years. The stock is expected to pay dividends of $1.50 p

er share in each of the 2 years and sell for $20 at the end of two years. If the investor requires an 8% return on this stock, how much should they pay for it using the Dividend Discount Model?
Business
1 answer:
xz_007 [3.2K]3 years ago
3 0

Answer: $19.82

Explanation:

The price the investor would be willing to pay today would be the present value of the dividends and the selling price at the end of 2 years using the required return as the discount rate.

= 1.50 / (1 + 8%)  + 1.50 / (1 + 8%)²   + 20 / (1 + 8%)²

= 1.3888889 + 1.286 + 17.1467764

= $19.82

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