# Common stock question

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You are considering the purchase of a share of Alfa Growth, Inc. common stock. You expect to sell it at the end of one year for \$92.11 per share. You will also receive a dividend of \$4.98 per share at the end of the next year. If your required return on this stock is 10.49%, what is the most you would be willing to pay for Alfa Growth, Inc. common stock now?

Oct 3rd, 2015

Let X = the amount you are willing to pay for Alfa Growth, Inc. common stock now

(\$4.98 + \$92.11 - X)/ X = 10.49%

\$4.98 + \$92.11 - X= 0.1049X

\$97.09 - X= 0.1049X

1.1049X= \$97.09

X = \$97.09/ 1.1049

X = \$87.87

Sep 18th, 2015

This makes sense, thank you.

I have another problem.

Green company's common stock is currently selling for \$75.16 per share. Last year, the company paid dividends of \$1.25 per share. The projected growth at a rate of dividends for this stock is 6.24%. Which rate of return does the investor expect to receive on this stock if it is purchased?

Sep 18th, 2015

I am glad I was able to explain it to you. Please create a question for this new problem, then invite me to answer.

Sep 18th, 2015

Would it be \$1.25 / \$75.16 * 6.24% = 10.38%

Sep 18th, 2015

No, the formula is different since there is a growth rate.

Sep 18th, 2015

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Oct 3rd, 2015
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Oct 3rd, 2015
Nov 20th, 2017
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