Suppose you are considering buying a stock. You expect the stock to pay a dividend of $$3$ one year from today, $$3\mathrm{.}50$ two years from today, and then dividend will grow $2\%$ each year after that. Using the CAPM, you estimate your required return at $9\%$ to compensate you for the risk of this stock's cash flows. What is the maximum price you are willing to pay for a share of the stock? LO$3$

Type: Multiple Choice

Points Awarded: $\frac{0\mathrm{.}000}{1\mathrm{.}000}$

User Answer$($s$)$:

$$40\mathrm{.}21$

Rationale: Feedback: Section $8\mathrm{.}3.$ Valuing Stock: The Dividend Discount Model; Example $8\mathrm{.}3\mathrm{.}3.$ Find the intrinsic value of a stock with variable dividends

$PV=PV($ Dividend $1$ through $2)+PV(Dividend3$ through $)=(\frac{\text{\$}3}{1\mathrm{.}09}+\frac{\text{\$}3\mathrm{.}50}{{1\mathrm{.}09}^2})+(\frac{\frac{(\text{\$}3\mathrm{.}501\mathrm{.}02)}{(0\mathrm{.}09-0\mathrm{.}2)}}{{1\mathrm{.}09}^2})$

$PV=5\mathrm{.}6982+42\mathrm{.}93$

$PV=$$$8\mathrm{.}62$