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You are looking at buying a stock and holding for 3 years. A stock will pay a dividend of $1 in 1 year, a dividend of $2 in 2 years and a dividend of $3 in 3 years. You think you will be able to sell the stock for $75 at that time. If your required return for the stock is 9%, what is the most that you should be willing to pay for it?

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Answer:

The most that you should be willing to pay is $62.83

Explanation:

Consider the following formula:

Value of stock=Future dividend and value*Present value of discounting factor(rate%, time period)

=1/1.09+2/1.09^2+3/1.09^3+75/1.09^3

=$62.83(Approx).

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