A share of Big Time Corporation is expected to sell for $125 a year from now and pay an annual dividend of $10.If you could buy risk-free assets with a 4% rate of interest and your risk premium for this stock is 3%,what is the most you would be willing to pay for the stock today (rounded to the nearest dollar)?

Question

Quizplus · Accepted Answer

The present value (PV) of the future selling price and dividends can be calculated as follows:
PV = [$10/(1+0.04)] + [$125/(1+0.04)^1] = $10.58 + $120.19 = $130.77
Therefore, the most you would be willing to pay for the stock today (rounded to the nearest dollar) is:
Max Price = PV × [1/(1+0.03)] = $126.49 ≈ $126
Thus, the best choice is C) $126.

A Share of Big Time Corporation Is Expected to Sell