The price of Jane's Book Co. is now

$55.

The company pays no dividends. Ms. Johnson expects the price four years from now to be

$85

per share. Should she buy Jane's Book Co. stock if she desires a rate of return of

11%?

Explain.

(Hint:

Evaluate this situation using justified price (intrinsic value). In this case ignore dividends.)

The justified price (or intrinsic value) of the stock is

$nothing.

(Round to the nearest cent.)Should she buy Jane's Book Co. stock if she desires a rate of return of

11%?

(Select the best choice below.)

A.

Yes. Even though the expected rate of return is just under Ms. Johnson's required rate of return, she should purchase the stock because the justified price is very close to the current price and thus will earn about the required rate of return.

B.

Yes. Ms. Johnson should purchase the stock because the justified price is greater than the current price and thus will earn more than the required rate of return.

C.

No. Ms. Johnson should not purchase the stock because the justified price is much less than the current price and thus will earn less than the required rate of return.

D.

No. Even though the expected rate of return is just under Ms. Johnson's required rate of return, she should not purchase the stock because the stock does not pay dividends and thus will not earn less than the required rate of return.