You are considering purchasing common stock in AMZ Corporation. You anticipate that the company will pay dividends of $5.00 per share next year and $7.50 per share in the following year
You also believe that you can sell the common stock two years from now for $30.00 per share. If you require a 14% rate of return on this investment, what is the maximum price that you would be willing to pay for a share of AMZ common stock?
Answer:
PV = $5.00 /(1.14)1 + ($7.50 + $30.00)/(1.14)2
= $33.24
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