One-Period Model: 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)

Question

Quizplus · Accepted Answer

We can use the dividend discount model to solve for the price of the stock today.
P = (Dividend next year + Expected price next year)/(1+required rate of return)
P = (4.50 + 85)/(1+0.15)
P = $77.82 (rounded off to the nearest $0.01)
Therefore, option D is the best choice.

One-Period Model: Assume That You Are Considering the Purchase of a Stock