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Guzman owns 1 share of stock A and 1 share of stock B. In 1 year from today, the total value of his holdings is expected to be $144. Stock A is currently priced at $59.76 has an expected return of 5.40% and is expected to pay a dividened of $3.74 in 1 year from today. Stock B has wn expected return of 12.03% and is exepcted to pay a dividened of $4.89 in 1 year from today. what is the price of stock B today?

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Answer #1

Price of Stock A in 1 year:

Required Return = [P1 - P0 + D1] / P0

0.054 = [P1 - $59.76 + $3.74] / $59.76

0.054 * $59.76 = P1 - $56.02

P1 = $3.23 + $56.02 = $59.25

Value of holdings in 1 year = Price of Stock A in 1 year + Price of Stock B in 1 year

$144 = $59.25 + Price of Stock B in 1 year

Price of Stock B in 1 year = $144 - $59.25 = $84.75

Price of Stock B now:

Required Return = [P1 - P0 + D1] / P0

0.1203 = [$84.75 - P0 + $4.89] / P0

0.1203 * P0 = $88.50 - P0

P0 + [0.1203 * P0] = $89.64

1.1203 * P0 = $89.64

P0 = $89.64 / 1.1203 = $80.02

So, option "b" is correct.

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