You are considering acquiring a common stock that you would like to hold for one year.You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year.The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return.
A)$23.91
B)$14.96
C)$26.52
D)$27.50
E)none of the above

Question

Quizplus · Accepted Answer

To calculate the maximum price you would pay today, we need to use the formula for the present value of a stock:

Present Value = (Dividends + Sale Price) / (1 + Return)^n

Where n is the number of years we plan to hold the stock. Plugging in the numbers:

Present Value = ($0.75 + $16) / (1 + 0.12)^1

Present Value = $16.75 / 1.12

Present Value = $14.96

So the maximum price you would pay for the stock today is $14.96 if you want to earn a 12% return. Therefore, the correct answer is B.

You Are Considering Acquiring a Common Stock That You Would