Valorous Corporation will pay a dividend of $ 1.75 per share at this year's end and a dividend of $ 2.35 per share at the end of next year. It is expected that the price of Valorous' stock will be $ 40 per share after two years. If Valorous has an equity cost of capital of 8 %, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?

Question

Leslie Lara

Business

10 January, 18:10

Valorous Corporation will pay a dividend of $ 1.75 per share at this year's end and a dividend of $ 2.35 per share at the end of next year. It is expected that the price of Valorous' stock will be $ 40 per share after two years. If Valorous has an equity cost of capital of 8 %, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?

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Answers (2)

Know the Answer?

Maximilian Barton · Answer 1

In your calculator press 8 percent times $1.75. $1.75 take away the answer then do 8% times $2.35. 2.35 take away the answer. 8 percent times 40 dollars. 40 dollars take away the answer. You plus the, or take away the 3 answers. That is your answer for the question.

Everett · Answer 2

The maximum price that a prudent investor would be willing to pay for a share of Valorous stock today is $37.92

Explanation:

In order to calculate the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today we would have to use the following formula:

Current price=future dividends*present value of discount factor (8%, time period)

Therefore, current price = $40/1.08^2 + $2.35/1.08^2 + $1.75/1.08 =

current price=$34.29+$2,01+$1,62

current price=$37.92

The maximum price that a prudent investor would be willing to pay for a share of Valorous stock today is $37.92