Suppose Acap Corporation will pay a dividend of $2.71 per share at the end of th

Question

Suppose Acap Corporation will pay a dividend of $2.71 per share at the end of this year and $2.99 per share next year. You expect Acap's stock price to be $51.34 in two years. Assume that Acap's equity cost of capital is 8.6%. a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year? c. Given your answer in part (b), what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one year? How does this compare to your answer in part (a)? a. If you planned to hold the stock for two years, the price you would pay for a share of Acap stock today is $. (Round to the nearest cent.)

Explanation / Answer

a) Year Cashflow PV @ 8.6% Present Value 1 $2.71 0.9208 $2.50 2 $2.99 0.8479 $2.54 2 $51.34 0.8479 $43.53 Total $48.56 P(0) = 2.71 / 1.086 + (2.99 + 51.34) / 1.086^ 2 $48.56 b) P(1) = (2.99 + 51.34) / (1+8.6%) = $50.03 c) P(0) = (2.71 + 50.03) /( 1+ 8.6%) = $48.56 Acap stock today's price is same in both situation a and c.

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