A stock currently sells for $30 per share and pays $1.00 per year in dividends.What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12 percent return on equity investments?

Question

Quizplus · Accepted Answer

The investor's valuation of the stock is calculated using the formula for the present value of expected future cash flows: $ \text{Valuation} = \frac{\text{Expected Price} + \text{Dividend}}{1 + \text{Required Return}} $. Substituting the given values: $ \frac{37 + 1}{1.12} = 33.93 $.

A Stock Currently Sells for $30 Per Share and Pays