Common stock question

Business & Finance
Tutor: None Selected Time limit: 1 Day

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

Thank you for the opportunity to help you with your question! IF you have any clarification, please don't hesitate to ask and I will do my best to answer. ++++++++++++

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


Please let me know if you need any clarification. I'm always happy to answer your questions.
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
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