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21 August, 21:28

ou have been researching a company and have estimated that the firm's stock will sell for $44 a share one year from now. You also estimate the stock will have a dividend yield of 2.18 percent. How much are you willing to pay per share today to purchase this stock if you desire a total return of 15 percent on your investment? A. $37.55B. $38.00C. $38.24D.$39.00E. $40.20

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  1. 22 August, 00:53
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    The correct answer to the question is $39.00, option d

    The maximum a rational investor could pay for a share is the present value of the future cash flows from investing in the share.

    The cash flows in this case refers both dividends and price receivable from eventual disposal of the share.

    Explanation:

    The present value of $44 and 2.18% of $44=$0.96

    PV = Total cash flow * discounting factor using 15%

    Total cash flows=$44+$0.96

    Total cash flows=$44.96

    DCF = 1 / (1+0.15) ^1

    DCF=0.8695

    PV=0.8695*44.96

    PV=$39
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