Zephyr Inc. sells wind based systems for generating electricity. The company pays no dividends, but you estimate the stock will be worth $50 per share 5 years from now and you require a 15% rate of return for stock investments of this type. What price should you be willing to pay for this stock?
A) $12.50
B) $24.86
C) $43.48
D) $57.50

Question

Quizplus · Accepted Answer

To find the price you should be willing to pay for the stock, you need to discount the future value ($50) back to the present value using the required rate of return (15%). The formula for the present value is PV = FV / (1 + r)^n, where FV is the future value ($50), r is the rate of return (0.15), and n is the number of years (5). Plugging in these values gives PV = $50 / (1 + 0.15)^5, which calculates to approximately $24.86.