You are considering the purchase of a certain stock. You expect to own the stock for...

You are considering the purchase of a certain stock. You expect to own the stock for the next four years. The current market price of the stock is $24.50 and you expect to sell it for $55 in four years. You also expect the stock to pay an annual dividend of $1.25 at the end of year 1, $1.35 at the end of year 2, $1.45 at the end of year 3 and $1.55 at the end of year 4. What is your expected return from this investment?

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Expert Solution

		20.00%		28%

		NPV@ 0.2		PV@ 0.28
Year	Cash flow	PV factor	PV-Cash flow	PV factor	PV-Cash flow
0	(24.50)	1.000	(24.50)	1.000	(24.50)
1	1.25	0.833	1.04	0.781	0.98
2	1.35	0.694	0.94	0.610	0.82
3	1.45	0.579	0.84	0.477	0.69
4	1.55	0.482	0.75	0.373	0.58
4	55.00	0.482	26.52	0.373	20.49

		Total PV	5.59	Total FV	(0.94)

	Expected return	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
		'=0.2+ (0.28-0.2)*(5.5896/(5.5896-(-0.941)
		26.85%

jeff jeffy answered 1 year ago

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