You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return.

Question

Quizplus · Accepted Answer

To determine the maximum price to pay for the stock today, we need to use the formula for present value:

PV = (Dividends + Price at the end of the year) / (1 + rate of return)^time

PV = (0.75 + 16) / (1 + 0.12)^1
PV = 16.75 / 1.12
PV = 14.96

Therefore, the maximum price to pay for the stock today to earn a 12% return is $14.96. The best choice is B.

You Are Considering Acquiring a Common Stock That You Would