You expect a share of EconNews.com to sell for $65 a year from now and to pay a $2 dividend per share in one year.What should you pay (rounded to the nearest dollar)for the stock today if you require a 4% return?

Question

Quizplus · Accepted Answer

We can use the formula for the present value of a stock:
PV = (D + P1) / (1 + r)
where PV is the present value, D is the dividend, P1 is the expected share price in one year, and r is the required return.

Substituting the given values, we get:
PV = (2 + 65) / (1 + 0.04) = 62.5

Rounding to the nearest dollar, the answer is $64. Therefore, the best choice is C) $64.

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