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?

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can calculate the present value of the stock as follows:

PV = (2/(1+0.10)^1) + (3.50/(1+0.10)^2) + (5.00 + 75)/(1+0.10)^3 
PV = 1.8182 + 2.7103 + 66.233 
PV = $70.7615

Therefore, the maximum price you should be willing to pay for this stock today is $64.82, which is the closest answer choice.

The Dividend on Simple Motors Common Stock Will Be $2