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Suppose you are thinking of purchasing the stock of Moore Oil, Inc. You expect it to pay a $2 dividend in one year, $2.10 in two years, $2.15 in three years, and you believe that you can sell the stock for $15 at the end of year three. If you require a return of 15% on investments of this risk, what is the maximum you would be willing to pay?
a. $14.6
b. $13.19
c. $13.33
d. $12.15

Respuesta :

Answer:

The maximum price you would be willing to pay is $13.33 (Option C).

Explanation:

The maximum price that you are willing to pay is equal to the sum of the present value of the returns (dividends plus selling price), at a discount rate of 15%.

We can calculate the present value as:

[tex]PV=\sum CF_k/(1+r)^k\\\\PV=\frac{2}{(1+0.15)}+\frac{2.1}{(1+0.15)^2}  +\frac{2.15}{(1+0.15)^3}+ \frac{15}{(1+0.15)^4}\\\\PV=1.74+1.59+1.41+8.58=13.32[/tex]

The maximum price you would be willing to pay is $13.33 (Option C).

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