stats economics

Question

Compute the price of a share of stock that pays a dividend of 1 dollar per year and that you expect to be able to sell in one year for twenty dollars. Assume that you require a 15% return.

Answer 1

Thank you for posting your question!

To solve this one you want to solve for the present value of both the $1 dividend and $20 selling price. Using the time value of money formula that would mean taking

$1 / (1 + 0.15) + $20 / (1 + 0.15)

=$0.87 + $17.39

=$18.26

So the current price of this stock would be $18.26