You are considering purchasing a share of Cass Inc. stock today for $75.00. You forecast no dividend payment this year but two years from today, you expect a $10 dividend. You plan to sell the stock immediately after receiving the dividend. If you want a return of 15% on the investment, how much must your forecast of the stock price be two years from today?

Question

Quizplus · Accepted Answer

The correct answer is A.The present value of the dividend is $10 / (1 + 0.15)^2 = $7.52. The present value of the stock price two years from today is $75 / (1 + 0.15)^2 = $56.52. The total present value of the investment is $7.52 + $56.52 = $64.04. The future value of the investment must be $64.04 * (1 + 0.15)^2 = $89.19.

You Are Considering Purchasing a Share of Cass Inc