Assume that you are considering the purchase of a stock which will pay dividends of $4.50 during the next year. Further assume that you will be able to sell the stock for $85.00 one year from today and that your required rate of return is 15 percent. How much would you be willing to pay for the stock today? (Round off to the nearest $0.01)
A) $89.50
B) $65.37
C) $94.10
D) $77.83

Question

Quizplus · Accepted Answer

To find the present value of the stock, we need to use the formula: 
PV = Dividend / (1 + r) + Price / (1 + r)
where PV is the present value, Dividend is the dividend to be received, Price is the price at which the stock can be sold after one year, r is the required rate of return.

So, PV = 4.50 / (1 + 0.15) + 85 / (1 + 0.15) = 3.91 + 73.91 = 77.83
Therefore, the maximum amount you should be willing to pay for the stock today is $77.83. Option D is the correct choice.

Assume That You Are Considering the Purchase of a Stock