Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of th

Question

Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year, and $3.00 per share next year. You expect Acap's stock price to be $52.00 in two years. If Acap's equity cost of capital is 10.0%:

a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years?

b. Suppose instead you plan to hold the stock for one year. What price would you expect to be able to sell a share of Acap stock for in one year?

c. Given your answer in part

(b),

what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? How does this compare to your answer in part

(a)?

(Note: Make sure to round all intermediate calculations to at least five decimal places.)

Explanation / Answer

Solution:

a.     P(0) = 2.80 / 1.10 + (3.00 + 52.00) / 1.102 = $48.00

b.     P(1) = (3.00 + 52.00) / 1.10 = $50.00

c.     P(0) = (2.80 + 50.00) / 1.10 = $48.00

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