Question

Suppose Acap Corporation will pay a dividend of $2.89 per share at the end of this year and $2.99 per share next year. You expect​ Acap's stock price to be $51.75 in two years. Assume that​ Acap's equity cost of capital is 8.5%.

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? (Round to the nearest​ cent.)

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? (Round to the nearest​ cent.)

c. Given your answer in ​(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 ​(a​)? (Round to the nearest​ cent.)

Answer 1

a) price would you be willing to pay for a share of Acap stock​ today	49.16
Statemnet showing Current Price
Particulars	Time	PVf 8.5%	Amount	PV
Cash inflows (Dividend)	1.00	0.9217	2.89	2.66
Cash inflows (Dividend)	2.00	0.8495	2.99	2.54
Cash inflows (Price)	2.00	0.8495	51.75	43.96
Current Price of Stock				49.16
b) price would you expect to be able to sell a share of Acap stock in one​ year	50.45
Statemnet showing Current Price
Particulars	Time	PVf 8.5%	Amount	PV
Cash inflows (Dividend)	1.00	0.9217	2.99	2.76
Cash inflows (Price)	1.00	0.9217	51.75	47.70
Price of stock in 1 year				50.45
c)
Statemnet showing Current Price
Particulars	Time	PVf 8.5%	Amount	PV
Cash inflows (Dividend)	1.00	0.9217	2.89	2.66
Cash inflows (Price)	1.00	0.9217	50.45	46.50
Current Price of Stock				49.16
It will be same as answer in part a