Fanshaw Corporation is expected to pay an annual dividend of $0.20 per share in the coming year,and to trade for $15.15 at the end of the year.If investments with the same risk as Fanshaw's stock have an expected return of 10.75%,what is the most you would pay today for Fanshaw's stock?

Question

Quizplus · Accepted Answer

To find the most you would pay today for Fanshaw's stock, you can use the dividend discount model for a one-year horizon, which is given by the formula: $ P_0 = \frac{D_1 + P_1}{1 + r} $, where $P_0$ is the price you would pay today, $D_1$ is the dividend next year, $P_1$ is the price at the end of the year, and $r$ is the required rate of return. Plugging in the given values: $ P_0 = \frac{0.20 + 15.15}{1 + 0.1075} = \frac{15.35}{1.1075} = 13.86 $.

Fanshaw Corporation Is Expected to Pay an Annual Dividend of $0.20