A share of stock will pay a dividend of $20 in one year,and will be sold for an expected price of $500 at that time.If the current one-year interest rate is 5%,the current price of the stock will be approximately equal to

Question

Quizplus · Accepted Answer

To calculate the current price of the stock, we need to discount the expected future cash flows back to the present using the one-year interest rateof 5%. 
The present value of the expected selling price of the stock is: $500/(1+0.05) = $476.19 
The present value of the expected dividend payment is: $20/(1+0.05) = $19.05 
Therefore, the current price of the stock is: $476.19 + $19.05 = $495.24 (rounding to the nearest cent) 
So, the closest option is B, $495.

A Share of Stock Will Pay a Dividend of $20