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 be the current price of this stock?
A) $137.50
B) $150.22
C) $162.18
D) $98.25
E) $175.83

Question

Quizplus · Accepted Answer

The current price of the stock can be calculated using the formula for the present value of expected future cash flows: P0 = (D1 + P1) / (1 + r), where D1 is the expected dividend, P1 is the expected selling price, and r is the required rate of return. Substituting the given values: P0 = ($5.50 + $154) / (1 + 0.16) = $137.50.

You Are Trying to Determine the Appropriate Price to Pay