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Maximum stock price using MARR

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What is the maximum stock price that should be paid for a stock today that is expected to consistently pay a $5 quarterly dividend (paid out to the investor) if its price is expected to be $100 in 3 years (12 quarters)? The investor expects a minimum acceptable rate of return (MARR) of 10% with quarterly compounding.

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Solution Preview

The first step is to find the present value of the dividend payments. We can find this by finding the present value of an annuity, which is equal to A[(1-(1/(1+(r/m))^(nm)))/(r/m)], where A = $5, r = .1, n = 3, and m = 4. Given this, the ...

Solution Summary

The maximum stock price is uncovered in this solution.

$2.19