Question

Jacobson, Inc. has common stock with market price of $50 and expected to pay dividend of $2.50 per share at the end of the year.

1. You intend to purchase the stock at the market price, hold it for one year, and sell it after a dividend of $2.50 is paid. How much will the stock price have to appreciate for you to satisfy your required rate of return of 12 percent?
2. You intend to purchase the stock today, hold it for one year, and sell it at an expected price of $55 at the end of the year when a dividend of $2.50 is paid. How much are you willing to pay for this stock if your required rate of return is 15%?

Answer 1

a.Required return=(End value-Beginning value+Dividend)/Beginning value  

0.12=(End value-50+2.5)/50

(0.12*50)=End value-47.5

End value=6+47.5

=$53.5

Hence appreciation in price=(End value-Beginning value)

=(53.5-50)

=$3.5

=(3.5/50)

=7%

b.Current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=2.5/1.15+55/1.15

=$50