Question

Suppose Acap Corporation will pay a dividend of $2.81 per share at the end of this year, and $3.09 per share next year. You expect Acap's stock price to be $53.16 in two years. If Acap's equity cost of capital is 11.4% a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? b. Suppose instead you plan to hold the stock for one year. What price would you expect to be able to sell a share of Acap stock for in one year? c. Given your answer in part (b), what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? How does this compare to your answer in part (a)? (Note: It is best not to round intermediate calculations - make sure to carry at least four decimal places in intermediate calculations.) a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? The price you would be willing to pay, if you planned to hold the stock for two years, is $ (Round to the nearest cent.) b. Suppose instead you plan to hold the stock for one year. What price would you expect to be able to sell a share of Acap stock for in one year? You would expect in one year to be able to sell an Acap share at $ . (Round to the nearest cont.) c. Given your answer in part (b), what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? The price you would pay for an Acap share today is $ (Round to the nearest cent) Click to select your answer(s).

Answer 1

	dividend	$ per share
	1st year	2.81
	2nd year	3.09
	Ex. Price at t=2	53.16
	The problem is based dividend discount model
Answer
a
	price	=	D1/1+.114	+	(D2+sale price of share)/(1+.114)2
			2.81/1.114	+	(3.09+53.16)/(1.114)*2
			2.522537	+	45.32625
		$	47.84879	Per share
b	price of share		24.6491
c	price willing to pay	24.6491