How much would you pay for a common share today, if you expect it will pay a dividend of $2.50 each year and will sell for $58 one year from now? Assume your required rate of return on this share is 13.0%.

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can calculate the present value of the stock as follows:
PV = (Dividend/1+R) + (Sale Price/1+R)
PV = (2.50/1+0.13) + (58/1+0.13)
PV = 2.21 + 51.33
PV = 53.54
Therefore, the maximum price to pay for this stock is $53.54. The best choice is C.

How Much Would You Pay for a Common Share Today