A friend has started a business. His product is a great success and the firm quickly grows large enough to be able to sell stock. The firm promises to pay a dividend of $8 per share every year for the next 53 years at which point the friend intends to shut down the business. The firm's stock is currently selling for $78 per share. If you believe that the company really will pay dividends as states and if you require a rate of return of 12% to make this investment, should you buy the stock? 1. No, according to the fundamental value equation, the price will be equal to $78  2. Yes, according to the fundamental value equation, the price will be more than $78  3. Yes, according to the fundamental value equation, the price will be less than $78  4. No, according to the fundamental value equation, the price will be less that $78    Please choose one of the options and explain

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

A friend has started a business. His product is a great success and the firm quickly grows large enough to be able to sell stock. The firm promises to pay a dividend of $8 per share every year for the next 53 years at which point the friend intends to shut down the business. The firm's stock is currently selling for $78 per share. If you believe that the company really will pay dividends as states and if you require a rate of return of 12% to make this investment, should you buy the stock?

1. No, according to the fundamental value equation, the price will be equal to $78 

2. Yes, according to the fundamental value equation, the price will be more than $78 

3. Yes, according to the fundamental value equation, the price will be less than $78 

4. No, according to the fundamental value equation, the price will be less that $78 

 

Please choose one of the options and explain 

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Insider Trading
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education