Description
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?
Explanation & Answer
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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
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