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Selling Price of Stock: Atlanta Company Example

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Atlanta Company stock is expected to follow an exponential growth rate. The relationship between the current stock price P0, future price PT after time T, and the continuously compounded rate of return r, is: PT = P0erT. The stock does not pay any dividends and it sells for $55 a share. The continuously compounded expected return of the stock is 13%, with standard deviation of 35%. Find the probability that the stock will be selling for more than $65 after one year.

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Solution provides steps necessary to find the probability needed.

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Threshold price in one year: 65
Stock price now: 55

Required return to reach 65: 16.71%
Standard deviation of return: 35%
Expected annual return: 13%
Probability of exceeding 65 in one year: 45.78%

For the ...

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