Common stock is held for two years, during which time it receives an annual dividend of...
Common stock is held for two years, during which time it receives an annual dividend of $8.08. The stock was sold for $100 and generated an average annual return of 16 percent. What price was paid for the stock?
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$61.60 |
||
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$64.80 |
||
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$88.00 |
||
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$90.91 |
Homework Answers
Given about a common stock
annual dividend = $8.08
So, D1 = D2 = $8.08
Price of stock at year 2 P2 = $100
average annual return = 16%
So, stock price today P0 = D1/(1+r) + D2/(1+r)^2 + P2/(1+r)^2
So, P0 = 8.08/1.16 + 8.08/1.16^2 + 100/1.16^2
P0 = $87.30
So, approximately stock was purchased at $88 2 year ago.
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