Question

1. How much would you pay for a share of stock paying a dividend​(cash payout ​C) of ​$4 to be paid in one​ year, a known selling price in one year ​(​P) of ​$50​, and expected return ​(R) of similar assets of 2​%?2. Compute the price of a share of stock that pays a​$1.50 per year dividend and that you expect to be able to sell in one year for ​$20, assuming you require a 10​% return.

Answer 1

Answer and Explanation:

The computation is shown below:

a. The willing to pay is

= (Current year price) ÷ (1 + rate) + (current year dividend) ÷ (1 + rate)\

= ($50) ÷ (1 + 0.02) + ($4) ÷ (1 + 0.02)

= $52.94

b. The price of a share is

= (Current year price) ÷ (1 + rate) + (current year dividend) ÷ (1 + rate)\

= ($20) ÷ (1 + 0.10) + ($1.50) ÷ (1 + 0.10)

= $19.55

We simply applied the above formula so that the correct value could come

And, the same is to be considered