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You are considering the purchase of a share of Edie's common stock. You expect to sell...

You are considering the purchase of a share of Edie's common stock. You expect to sell it at the end of 1 year for $32.00. You will also receive a dividend of $2.50 at the end of the year. Edie just paid a dividend of $2.25. If your required return on this stock is 12%, what is the most you would be willing to pay for it now?

**** PLEASE EXPLAIN IN DETAILS. ALSO PLEASE EXPLAIN HOW YOU GET THE VALUE OF 1.12 IN YOUR CALCULATIONS. THANK YOU.

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Answer #1

The most that I will be willing to pay for the stock is the present value of dividebd and sale price expected to be received

Dividend already paid is not relevant since it will not be received by me.

I will received $2.5 dividend and sale price $32

Required return on stock = 12%

Hence, amount to be paid today = (2.5+32)/(1+12%)

= (34.5)/1.12

= $30.8036

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