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Author Question: You want to invest in a stock that pays 6.00 annual cash dividends for the next five years. At the ... (Read 161 times)

Lobcity

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  • Posts: 524
on: Jul 10, 2018
You want to invest in a stock that pays 6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for 30.00. If you want to earn 10 on this investment, what is a fair price for this stock if you buy it to
 
  A) 41.37
  B) 40.37
  C) 22.75
  D) 18.63

Question 2

You want to invest in a stock that pays 5.00 annual cash dividends for the next four years. At the end of the four years, you will sell the stock for 20.00. If you want to earn 12 on this investment, what is a fair price for this stock if you buy it to
 
  A) 40.00
  B) 43.90
  C) 27.90
  D) 25.42


pikon

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Reply #1 on: Jul 10, 2018
Answer to Question 1

Answer: A
Explanation: A) The fair price is the present value of the selling price plus the present value of the dividend stream. Thus, today's price (P) = (future price  PVF) + (dividend stream  PVAF)
= (30  0.620921) + (6  3.790787) = 18.628 + 22.745 = 41.372 or about 41.37.
MODE = END
INPUT 5 10 ? -6 -30
KEY N I/Y PV PMT FV
CPT 41.37

Answer to Question 2

Answer: C
Explanation: C) N = 4, I/Y = 12, PMT = -5, FV = -20, Answer, PV = 27.90


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