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Assume that you plan to buy a share of XYZ stock today and to hold it for two years. Your expectations are that you will not receive at the end of year 1, but will receive a dividend of $9.25 at the end of year 2. In addition, you expect to sell the stock for $150 at the end of year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?

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Solution Summary

The solution explains how to calculate the current price of a stock given the dividends and the expected price at the time of sale in the future.

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Whatever you are willing to pay for the stock would be the present value of the future cash flows. This ...

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