You expect Technomess Company common stock to pay a dividend of $2.40 one year from now. You can buy the stock now for $52, and you plan to sell the stock at the end of one year. Given the risk of the stock, your required rate of return is 16%. For what price would you need to sell your stock in one year in order to earn your required rate of return? a) $58 b) S15 c) $22 d) $60 e) $63

Question

Business

Donavan

20 August, 06:33

You expect Technomess Company common stock to pay a dividend of $2.40 one year from now. You can buy the stock now for $52, and you plan to sell the stock at the end of one year. Given the risk of the stock, your required rate of return is 16%. For what price would you need to sell your stock in one year in order to earn your required rate of return? a) $58 b) S15 c) $22 d) $60 e) $63

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Answers (1)

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Harmony Grant · Answer 1

Holding Period Return = Required rate of return = 16% = 0.16

Holding Period Return of Technomess stock = (Dividend realized + Capital Gain) / Purchase price

= ($ 2.40 + ($ X - $ 52) / $ 52

= (X - 49.6) / 52 (Assume X as selling price of stock)

0.16 * 52 = X - 49.6

8.32 + 49.6 = X

X = 57.92

= $ 58 (Approx.)

Explanation:

Refer to the answer.