You are considering the purchase of a share, gamma incorporate it common stock.

Question

You are considering the purchase of a share, gamma incorporate it common stock. You expect to sell it at the end of one year for $56 per share. You will receive $2.56 per share the end of the next year. If you're required return on the stock is 8.3% for first time, what is the most willing to pay for gamma common stock now? You are considering the purchase of a share, gamma incorporate it common stock. You expect to sell it at the end of one year for $56 per share. You will receive $2.56 per share the end of the next year. If you're required return on the stock is 8.3% for first time, what is the most willing to pay for gamma common stock now?

Explanation / Answer

The first-time return is the sale of share at $56 after one year.

The return is 8.3%. Assume the return is out of 100. Therefore, the total return would be (100 + 8.3 =108.3)

Today's payment for getting $56 after one year is ($56 / 108.3) * 100 = $51.70 (Answer)

Since the dividend is paid after one year, it should not be considered. Dividend is not first-time return.

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