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28 August, 15:16

You are looking at buying a stock and holding for 3 years. A stock will pay a dividend of $1 in 1 year, a dividend of $2 in 2 years and a dividend of $3 in 3 years. You think you will be able to sell the stock for $75 at that time. If your required return for the stock is 9%, what is the most that you should be willing to pay for it?

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  1. 28 August, 16:37
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    The most that you should be willing to pay is $62.83

    Explanation:

    Consider the following formula:

    Value of stock=Future dividend and value*Present value of discounting factor (rate%, time period)

    =1/1.09+2/1.09^2+3/1.09^3+75/1.09^3

    =$62.83 (Approx).
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