Zephyr Inc. sells wind based systems for generating electricity. The company pays no dividends, but you estimate the share will be worth $50 per share 5 years from now and you require a 15% rate of return for share investments of this type. What price should you be willing to pay for this share?

Question

Quizplus · Accepted Answer

The price you should be willing to pay is the present value of the future price, which is $50 discounted at a 15% rate over 5 years: $50 / (1 + 0.15)^5 = $24.86.