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Chapter 12: Q. 92 (page 825)

Refer to Problem 91. Suppose that a stock pays an annual dividend of $2.50 and, historically, the dividend has increased 4% per year. You desire an annual rate of return of 11%. What is the most that you should pay for the stock?

Short Answer

Expert verified

One should pa at most $39.7.

Step by step solution

01

Given information

We are givenP=2.5,i=0.04,r=0.11

02

Find the geometric sequence

We have,

Pn=1+i1+ran-1Pn=1+0.041+0.11an-1Pn=0.937an-1

03

Calculate The value of S

We use the formula S=a11-rWithr=0.937We get,

S=2.51-0.937S=39.7

04

Conclusion

One should pa at most $39.7.

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Most popular questions from this chapter

In Problems 51鈥�66, determine whether each infinite geometric series converges or diverges. If it converges, find its sum.

1-34+916-2764+....

In Problems 29鈥�36, the given pattern continues. Write down the nth term of a sequence ansuggested by the pattern.

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In Problems 17鈥�28, write down the first five terms of each sequence.

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In Problems 37鈥�50, a sequence is defined recursively. Write down the first five terms.

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In Problems 11鈥�16, evaluate each factorial expression.

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