You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $3.50 in dividends and $42 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 10% return.
A) $23.91
B) $24.11
C) $26.52
D) $27.50
E) None of the options are correct.

Question

Quizplus · Accepted Answer

To find the maximum price you would pay for the stock today to achieve a 10% return, you can use the dividend discount model for a one-year holding period, which is given by the formula: $$P_0 = \frac{D_1 + P_1}{1 + r}$$ where $P_0$ is the price you pay today, $D_1$ is the dividend received after one year, $P_1$ is the price at which you sell the stock after one year, and $r$ is the required rate of return (10% or 0.10 in this case). Plugging in the given values: $$P_0 = \frac{3.50 + 42}{1 + 0.10} = \frac{45.50}{1.10} = 41.36$$ Since none of the provided options match this calculation, the correct choice is E, indicating that none of the options are correct.

You Are Considering Acquiring a Common Stock That You Would