You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it to
A) $41.37
B) $40.37
C) $22.75
D) $18.63
Answer: A
Explanation: A) The fair price is the present value of the selling price plus the present value of the dividend stream. Thus, today's price (P) = (future price × PVF) + (dividend stream × PVAF)
= ($30 × 0.620921) + ($6 × 3.790787) = $18.628 + $22.745 = $41.372 or about $41.37.
MODE = END
INPUT 5 10 ? -6 -30
KEY N I/Y PV PMT FV
CPT 41.37
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