Janet is planning to purchase the stock of Mortensen Petro, Inc. She expects the stock to pay a $1.98 dividend next year, and she would sell the stock for $28 next year. If the required return of the stock is 12.5%, what is the (highest) price that she is willing to pay for the stock today?

Question

Zara Parker

Business

18 March, 07:04

Janet is planning to purchase the stock of Mortensen Petro, Inc. She expects the stock to pay a $1.98 dividend next year, and she would sell the stock for $28 next year. If the required return of the stock is 12.5%, what is the (highest) price that she is willing to pay for the stock today?

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Answers (1)

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Ahmed Mosley · Answer 1

Answer: Current Price $26.65

Explanation:

Rate of return = 12.5%

dividends = $1.98

Expected Price (in a year from now) Pe = $28

Current price = Pc

R = (Pe - Pc + D) / Pa

0.1250 = (28 - Pc + 1.98) / Pc

28 - Pc + 1.98 = 0.1250Pc

-Pc - 0.1250Pc = - 28 - 1.98

- 1.125Pc = - 29.98

Pc = - 29.98 / (-1.1250Pc) = 26.64888889

Pc = $ 26.65