You are trying to determine the fair price to pay for a share of Philip Morris. If you buy this stock, you plan to hold it for a year. At the end of the year, you expect to receive a dividend of $5.50 and to sell the stock for $154. The discount rate for Philip Morris stock is 16%. What should be the price of this stock?

Question

Quizplus · Accepted Answer

The fair price of the stock can be calculated using the dividend discount model for a one-year holding period, which is given by the formula: Price = (Dividend + Expected Price) / (1 + Discount Rate). Plugging in the values: Price = ($5.50 + $154) / (1 + 0.16) = $137.50.

You Are Trying to Determine the Fair Price to Pay