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Chapter 7: Q.22 (page 210)

Compute the price of a share of stock that pays a \(5per year dividend and that you expect to be able to sell in one year for \)40, assuming you require a 5%return.

Short Answer

Expert verified

Hence, $18.2609is the price of share.

Step by step solution

01

Share : 

A share is an undivided unit of a firm's capital that defines a shareholder's ownership of that company.

02

Explanation : 

Given,

The dividend on the share is $1.

The sale price of share is $20.

The required rate of return is 15%.

Formula :

P0=D11+ke+P11+ke

where,

P0= stock price at present.

D1= dividend for the first year.

P1= stock price after a year.

ke= required rate of return.

Substitute $1for D1, $20for P1and 0.15for ke.

P0=$11+0.15+$201+0.15=$0.8696+$17.3913=$18.2609

Hence, $18.2609is the price of share.

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