You are trying to value a 3-month futures contract on a stock.The market rate of return is 11.2 percent,the risk-free rate is 3.8 percent,and the dividend yield on the stock is 2.6 percent.The stock is currently selling for $33 a share.What is the value of "T" as used in the formula for computing the future stock price (F_T = S(1 - r)^T)? A) 0.112 B) 0.250 C) 0.026 D) 0.038 E) 0.064

Question

Quizplus · Accepted Answer

The formula for computing the future stock price is FS1U1B1TS1U1B0 = S(1 - r)^T, where:
- FS1U1B1T is the future stock price
- S is the current stock price
- r is the required rate of return
- T is the time horizon in years

In this case, we are valuing a 3-month futures contract, which is equivalent to 0.25 years. Thus, we need to solve for T in the following equation:
0.25 = T

The market rate of return is 11.2%, which is equivalent to 0.112 in decimal form. The risk-free rate is 3.8%, which is equivalent to 0.038 in decimal form. The dividend yield on the stock is 2.6%, which is equivalent to 0.026 in decimal form.

Substituting the given values into the formula, we get:
FS1U1B1TS1U1B0 = 33(1 - 0.038 - 0.026)^0.25
FS1U1B1TS1U1B0 = 33(0.936)^0.25
FS1U1B1TS1U1B0 = 33(0.9756)
FS1U1B1TS1U1B0 = $32.16

Therefore, the value of T is 0.25 or choice B.

You Are Trying to Value a 3-Month Futures Contract on a Stock.The