Demarius owns investment A and 1 share of stock B. The total value of his holdin

Question

Demarius owns investment A and 1 share of stock B. The total value of his holdings is 2,498.24 dollars. Investment A is expected to pay annual cash flows to Demarius of 370 dollars per year with the first annual cash flow expected later today and the last annual cash flow expected in 7 years from today. Investment A has an expected annual return of 11.91 percent. Stock B is expected to pay an annual dividend of 48.7 dollars forever with the next dividend expected in 1 year. What is the expected annual return for stock B? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Explanation / Answer

Calculate the expected return for stock B:

Present value of Innvestment A =pv(rate,nper,pmt)

where rate = 11.91% = 0.1191

nper = 7 years

pmt = 370

Therefore, PV of investment A =pv(0.1191,7,370) = $1693.42

Total holding = 2,498.24 in which 1693.42 is the holding of A

Holding of B = 2,498.24 - 1693.42 = 804.82

Hence, price of 1 share of stock B = $804.82

The Expected annual return of stock B = Dividend/Stock price

= 48.7/804.82 = 6.05%

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.