Valorous Corporation will pay a dividend of $1.80 per share at this year's end and a dividend of $2.40 per share at the end of next year.It is expected that the price of Valorous' stock will be $44 per share after two years.If Valorous has an equity cost of capital of 8%,what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?

Question

Quizplus · Accepted Answer

To find the maximum price a prudent investor would be willing to pay for a share of Valorous stock today, we need to calculate the present value of the expected future dividend payments and the expected sale price of the stock. 
Using the dividend discount model, we can calculate the present value of the two future dividends as:

PV of the first dividend = $1.80 / (1 + 0.08) = $1.67
PV of the second dividend = $2.40 / (1 + 0.08)^2 = $1.97

The present value of the expected sale price of the stock after two years can be calculated as:

PV of stock sale price = $44 / (1 + 0.08)^2 = $36.88

Then, the maximum price a prudent investor would be willing to pay for a share of Valorous stock today is the sum of these present values:

$1.67 + $1.97 + $36.88 = $40.52.

Therefore, the best answer choice is C, $41.45.

Valorous Corporation Will Pay a Dividend of $1