1.Suppose that a stock is expected to pay a $1 dividend at the end of this year

Question

1.Suppose that a stock is expected to pay a $1 dividend at the end of this year and that your required return on equity investments is 9%. Using a one-period model of stock price determination, if you expect to sell a stock you buy today a year later for $17.0, you will be willing to pay for the stock the amount $   (Round your response to the nearest two decimal places)

2.Suppose that a stock is expected to pay a $1 dividend next year, that the dividend is expected to grow at 2%

per year, and that your required return on this equity investment is 8%. Using the Gordon growth model, the price you would be willing to pay for the stock is $

Explanation / Answer

1.

Dividend paid at year end=$1

Selling price after one year=$17

Required rate of return=9%

Price today=Dividend + Price after one year   / required rate of return

P=1/ (1+.09) +17/(1+.09) =16.51

Stock purchase price =$16.51

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