Investors in a certain stock demand to be compensated for risk. The current stoc

Question

Investors in a certain stock demand to be compensated for risk. The current stock price is 100. The stock pays dividends at a rate proportional to its price The dividend yield is 2%.The continuously compounded risk-free rate is 5%. Assume there are no transaction costs. Let X represent the expected value of the stock price 2 years from today Assume it is known that X is a whole number. Determine which of the following statements if true about X.

A) The only possible value of X is 105

B) The largest possible value of X is 106

C) The smallest possible value of X is 107

D) The largest possible value of X is 110

E) The smallest possible value of X is 111

Explanation / Answer

Profit should be more than Zero

S0*e^((r-q)*T) or S0*exp((r-q)*T) = 100*exp((5%-2%)*2) = $106.18 = ~ 107

Hence, smallest number for X is 107

X > = 107

Correct option is > C) The smallest possible value of X is 107

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