You are considering the purchase of AMDEX Company stock. You anticipate that the company will pay dividends of $2.00 per share next year and $2.25 per share the following year
You believe that you can sell the stock for $17.50 per share two years from now. If your required rate of return is 12%, what is the maximum price that you would pay for a share of AMDEX Company stock?
Answer:
Vc = $2.00 PVIF12%,1 + $19.75 PVIF12%,2
= ($2.00)(.893) + ($19.75)(.797)
= $17.53
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