You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today?

Question

Quizplus · Accepted Answer

The correct answer is A because the fair price of the stock is $41.37. This is calculated by using the formula:Present Value = (Dividend / Discount Rate) + (Future Value / (1 + Discount Rate)^n)where:Dividend = $6.00Discount Rate = 10%Future Value = $30.00n = 5 yearsPlugging these values into the formula, we get:Present Value = (6.00 / 0.10) + (30.00 / (1 + 0.10)^5)Present Value = $60.00 + $18.63Present Value = $41.37

You Want to Invest in a Stock That Pays $6