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?

Question

Business

Natalie Pace

14 April, 16:55

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?

+1

Answers (1)

Know the Answer?

Ramon Foster · Answer 1

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).