Question
Suppose that if investors purchase a share of Firm A's stock today, with 50% of probability investors will receive a $120 per share dividend payment
Suppose that if investors purchase a share of Firm A's stock today, with 50% of probability investors will receive a $120 per share dividend payment one year later, and 50% probability they will receive $80. The firm will then be liquidated and the shares will not have any further claim on the firm's liquidation value. If stock investors demand a 8% return to invest in this firm, what must be the price per share today? If the discount rate increases to 10% today, what would be new price today? At the new price, what is investors' expected return during the year?
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Fundamentals Of Corporate Finance
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
5th Edition
0135811600, 978-0135811603
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