You are trying to determine the appropriate price to pay for a share of common stock. If you purchase this stock, you plan to hold it for 1 year. At the end of the year you expect to receive a dividend of $5.50 and to sell the stock for $154. The appropriate rate of return for this stock is 16 percent. What should the current price of this stock be?

Question

Quizplus · Accepted Answer

The current price of the stock can be calculated using the dividend discount model for a one-year holding period, which is given by the formula: $$P_0 = \frac{D_1 + P_1}{(1 + r)}$$ where $P_0$ is the current price of the stock, $D_1$ is the dividend received at the end of the year, $P_1$ is the price of the stock at the end of the year, and $r$ is the required rate of return. Plugging in the given values: $$P_0 = \frac{5.50 + 154}{(1 + 0.16)} = \frac{159.50}{1.16} = 137.50$$ Therefore, the current price of the stock should be $137.50.

You Are Trying to Determine the Appropriate Price to Pay