What is the maximum price you would pay to buy the stock?

Yuyen Corporation just paid a $5 dividend per share, you expect the dividend to grow at 10% for the next 2 years and expect to sell the stock at $65 at the end of year 2. What is the maximum price you would pay to buy the stock? The required rate of return is 12%

Expert Solution

Price = Current dividend*(1+growth rate)/(1+required rate)+(Current dividend*(1+growth rate)^2+selling price)/(1+required rate)^2

=5*(1+0.1)/(1+0.12)+(5*(1+0.1)^2+65)/(1+0.12)^2

=61.55

jeff jeffy answered 3 years ago

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