You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 15% return.

Question

Quizplus · Accepted Answer

To calculate the maximum price you would pay today, we need to calculate the present value of the expected future cash flows using a discount rate of 15%. 
PV of dividends = $2.50 / (1.15) = $2.17 
PV of sale price = $28 / (1.15) = $24.35 
Total PV = $2.17 + $24.35 = $26.52 
Therefore, the maximum price you would pay for the stock today is $26.52.

You Are Considering Acquiring a Common Stock That You Would