Question

Zlestion 7(6 pts); Please ansSwer the following two questions about stock price. a) What price would an individual be willing to pay today for a stock that is expected t $100 two years from now and which pays an annual dividend that is $6.00? Assume the individu has a required rate of return of 8%. b) You are thinking about investing in stock in a company which paid a dividend of $10 this year nd whose dividends you expect to grow at 4 percent a year. The required return is: fe price of the stock in the market is $200 a share, should you buy it? percent. If

Answer 1

Answer

A. Current price of the stock is $96.43

B. Yes, it is recommended to buy the stock because the current price of the stock is $260 but the same stock is available at $200.

Explanation

A.

Current Price of the stock is computed using the excel equation given below:

Current price = PV (RATE, NPER, PMT, FV)

= PV (8%, 2, $6, $100)

= $96.43

B.

Current price is computed using the equation given below:

Current price = {Dividend * (1 + growth rate)} / {Required rate - Growth rate}

= {$10 * (1 + 4%)} / {8% - 4%}

= $10.40 / 4%

= $260.

Yes, it is recommended to buy the stock because the current price of the stock is $260 but the same stock is available at $200. Hence, the investor earn profit in this deal.