1. Calculate the price of a stock that has a one-period horizon, is expected to pay a dividend of $.20 per share for the period, with the following prices and associated probabilities forecast at the end of the period:
Probability 0.3 0.1 0.2 0.3 0.1
Price $40 $45 $55 $62 $70
The return on comparable stocks is 8%.
2. Calculate the price of a stock with a three-year horizon, when the stock is expected to pay $2.50 per share in dividends each year, and has an expected value of $100 at the end of the third year. The return on comparable stocks is 6%.
The problem deals with estimating market price with provided provabilities.