Question

On January 1, 2016, Intel Corp’s stock traded for $40. It paid $0.40/quarter in 2016. Assume Intel will pay $0.45/quarter in 2017. Further assume that the prevailing interest rate is 0.6% per quarter. If you buy Intel stock on January 1, 2016, at what price would you have to be able to sell Intel stock at the end of 2017 in order to break even?

Select one:

a. 45.25

b. 36.69

c. 38.49

d. 41.23

Answer 1

Correct answer: c. $38.49

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A Quarter 1 -NMOOSE Dividend $0.40 $0.40 $0.40 $0.40 $0.45 $0.45 $0.45 $0.45 Interest rate (per quarter) 0.60% Present value of Dividends Current price of Stock $3.31 $40.00 For break even, Present value of Stock sell price at end of 2017 18 | $36.69| 21 thus, Sell price of stock at end of 2017 $38.49 22 23 20

Cell reference -

B 2 Dividend Quarter 1 12 0.4 0.4 0.4 0.4 5 0.45 8 0.45 9 10 0.45 0.45 11 12 Interest rate (per quarter) 0.006 =NPV(C12,C3:C10) 13 14 15 16 Present value of Dividends Current price of Stock 40 17 For break even, Present value of Stock sell price at end of 2017 =C13-C14 =C15 18 19 20 thus, Sell price of stock at end of 2017 =C18*(1+C12)^8

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.