You expect a share of RiskyEcon.com to sell for $56 a year from now and to pay a dividend of $1 per share annually.If the current interest rates on government bonds is 5%,but you demand a risk premium of 5% to hold a share of this risky stock,what is the most you would be willing to pay for this stock today (rounded to the nearest dollar)?

Question

Quizplus · Accepted Answer

The required rate of return is the sum of the risk-free rate (5%) and the risk premium (5%), totaling 10%. The expected future price of the stock is $56, and the expected dividend is $1. The present value of these cash flows is calculated as ($56 + $1) / (1 + 0.10) = $57 / 1.10 = $51.82, which rounds to $52.

You Expect a Share of RiskyEcon