Question

Q4) Suppose you are thinking of purchasing the stock of Moore Ofl, Inc. You expect it to pay a $2 dividend in one year, and you believe that you can sell the stock for $14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay? FV+D/(1+r) Zero Growth Model Q5) Suppose stock is expected to pay a S0.50 dividend every quarter and the required return is 10% with quarterly compounding, what is the price?

Answer 1

Answer to Question 4:

Expected Dividend, D = $2.00
Expected Price, FV = $14.00
Required Return, r = 20%

Stock Price, P = (D + FV) / (1 + r)
Stock Price, P = ($2.00 + $14.00) / (1 + 0.20)
Stock Price, P = $13.33

Answer to Question 5:

Quarterly Dividend, D = $0.50
Annual Required Return = 10%
Quarterly Required Return, R = 2.50%

Stock Price, P = D / R
Stock Price, P = $0.50 / 0.025
Stock Price, P = $20.00