You plan to buy some common stock and hold it for one year. You expect to receive both $1.20 in dividends and $62 from the sale of stock at the end of the year. If an investor wants to earn a 13% return, the maximum price you would pay for the stock today is

Question

You plan to buy some common stock and hold it for one year.  You  expect to receive both $1.20 in dividends and $62 from the sale of stock at the end of the year.  If an investor wants to earn a 13% return, the maximum price you would pay for the stock today is

Quizplus · Accepted Answer

The maximum price to pay for the stock today can be calculated using the formula for the present value of the expected cash flows, which includes the dividend and the sale price of the stock. The formula is: $$ \text{Price} = \frac{\text{Dividend} + \text{Sale Price}}{1 + \text{Return Rate}} $$ Plugging in the values: $$ \text{Price} = \frac{1.20 + 62}{1 + 0.13} = \frac{63.20}{1.13} = 55.93 $$ Therefore, the maximum price you would pay for the stock today to achieve a 13% return is $55.93.

You Plan to Buy Some Common Stock and Hold It