Question

Please solve clearly and explain all steps

Liquified Foods Inc. has declared its next three dividends will be $0.80, $0.95, and $1.12. The stock price should be $50.00 per share at the time of the third dividend. If an investor wants 9% return on his money, what is he willing to pay for a share of Liquified Foods Inc. now? He will pay $61.09 or less He will pay $41.01 or less He will pay $57.82 or less He will pay $36.63 or less He will pay $50.00 or less

Answer 1

The correct answer is :- He will pay $ 41.01 or less

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The maximum the investor is willing to pay for a share of the company now is calculated as : -

Current price of stock = Present value of expected future price stock + Present value of the expected dividends

$50 Present value of expected future price stock $ 38.61 (10.09)3

$0.80 $0.95 $1.12 Present value of expected dividend payments $2.40 (10.09)1 (1 +0.09)2 (1+0.09)3

Current price of stock = $ 38.61 + $ 2.40

Current price of stock = $ 41.01