Solved: Stock Price One method of pricing a stock is to
Chapter , Problem 13.3.99(choose chapter or problem)
Stock Price One method of pricing a stock is to discount the stream of future dividends of the stock. Suppose that a stock pays $P per year in dividends and, historically, the dividend has been increased i% per year. If you desire an annual rate of return of r%, this method of pricing a stock states that the price that you should pay is the present value of an infinite stream of payments: 1 + i (1 + i)2 ( 1 + i ) 3 Price = P + P--+ P -- + P -- + ... l+r 1+, . l +r The price of the stock is the sum of an infinite geometric series. Suppose that a stock pays an annual dividend of $4.00 and, historically, the dividend has been increased 3% per year. You desire an annual rate of return of 9%. What is the most you should pay for the stock?
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