A stock purchase contract with a zero initial premium calls for you to pay for one share

Question:

A stock purchase contract with a zero initial premium calls for you to pay for one share of stock in 3 years. The stock price is $100 and the 3-year interest rate is 3%.

a. If you expect the stock to have a zero dividend yield, what price in 3 years would you agree to pay for the stock?

b. If the stock has a 2% dividend yield, what price in 3 years would you agree to pay for the stock?

c. Now suppose that the stock purchase contract calls for you to pay $100 in 3 years for one share of stock. What annual payment on the stock purchase contract would be fair if the dividend yield on the stock is zero? What if it is 4%?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...