The dividend on Simple Motors common stock will be $2 in one year, $3.50 in two years, and $5.00 in three years. You can sell the stock for $75 in three years. If you require a 10% return on your investment, how much would you be willing to pay for a share of this stock today?
A) $59.69
B) $64.65
C) $64.82
D) $65.66
E) $71.30

Question

Quizplus · Accepted Answer

The present value of the dividends and the sale price is calculated using the formula for present value: PV = D1/(1+r)^1 + D2/(1+r)^2 + (D3 + P3)/(1+r)^3. Substituting the given values: PV = 2/(1.10)^1 + 3.5/(1.10)^2 + (5 + 75)/(1.10)^3 = $64.82.

The Dividend on Simple Motors Common Stock Will Be $2