Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5 percent, the current price of the stock would be ________.
A) $110.00
B) $101.00
C) $100.00
D) $96.19

Question

Quizplus · Accepted Answer

Using the one-period valuation model: 
P0 = D1/(1 + r) + P1/(1 + r) 
where P0 = current price, D1 = year-end dividend, r = required rate of return, and P1 = expected sales price.

Plugging in given values: 
P0 = 1/(1 + 0.05) + 100/(1 + 0.05) 
P0 = 0.95238 + 95.2381 
P0 = 96.1905

Therefore, the current price of the stock would be $96.19. The correct answer choice is (D).

Using the One-Period Valuation Model, Assuming a Year-End Dividend of $1.00