What would you pay for a share of ABC Corporation stock today if the next dividend will be $2 per share, your required return on equity investments is 12%, and the stock is expected to be worth $110
One year from now?

Question

Quizplus · Accepted Answer

Using the dividend discount model:
Stock price = (Next dividend / Required return on equity) + Expected stock price
Stock price = ($2 / 0.12) + $110 = $16.67 + $110 = $126.67
However, since we are trying to find the price today, we need to discount the expected stock price back by one year using the required return on equity:
Stock price today = Expected stock price / (1 + Required return on equity)
Stock price today = $110 / (1 + 0.12) = $98.21
Therefore, the answer is closest to option B, $100.

What Would You Pay for a Share of ABC Corporation