Question

A particular common stock has an annual cash dividend of $4 per share and is predicted to have a market value of $60 per share 5 years from now. Assuming a discount rate of 10%, a fair market price for the stock today is: (see present value tables from chapter)

A. $52.41
B. $40.00
C. $112.42
D. $75.16

Answer 1

The fair market price for the stock today is approximately $41.04 per share.

Step-by-step explanation:

The fair market price for the stock today can be calculated using the present discounted value (PDV) method. To calculate the PDV, we need to discount the future cash dividend and market value of the stock using the discount rate of 10%.

The present value of the $4 cash dividend per share is calculated using the formula: $4 / (1 + 0.10)^5 = $2.48685.

The present value of the $60 market value per share is calculated using the formula: $60 / (1 + 0.10)^5 = $38.55.

To get the fair market price for the stock today, we add the present values of the cash dividend and market value per share: $2.48685 + $38.55 = $41.03685.

Therefore, the fair market price for the stock today is approximately $41.04 per share.