Suppose Acap Corporation will pay a dividend of $2.75 per share at the end of this year and $2.95 per share next year. You expect Acap's stock price to be $51.61 in two years. Assume that Acap's equity cost of capital is 11.8%. 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. For what price would you expect to be able to sell a share of Acap stock in one year? c. Given your answer in (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 (a)? 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? If you plan to hold the stock for two years, the price you would pay for a share of Acap stock today is $_____ (Round to the nearest cent.) Part 2 b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year? The price for which you expect to sell a share of Acap stock in one year is $_______ (Round to the nearest cent.) c. Given your answer in (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 (a)? Given your answer in (b), the price you would be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year is $_______ (Round to the nearest cent.) Part 4 When you compare your answer in (a) to the answer in (c),
Suppose Acap Corporation will pay a dividend of $2.75 per share at the end of this year and $2.95 per share next year. You expect Acap's stock price to be $51.61 in two years. Assume that Acap's equity cost of capital is 11.8%. 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. For what price would you expect to be able to sell a share of Acap stock in one year? c. Given your answer in (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 (a)? 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? If you plan to hold the stock for two years, the price you would pay for a share of Acap stock today is $_____ (Round to the nearest cent.) Part 2 b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year? The price for which you expect to sell a share of Acap stock in one year is $_______ (Round to the nearest cent.) c. Given your answer in (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 (a)? Given your answer in (b), the price you would be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year is $_______ (Round to the nearest cent.) Part 4 When you compare your answer in (a) to the answer in (c),
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
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Concept explainers
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Topic Video
Question
Suppose Acap Corporation will pay a dividend of $2.75
per share at the end of this year and
$2.95 per share next year. You expect Acap's stock price to be $51.61 in two years. Assume that Acap's equity cost of capital is 11.8%.
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. For what price would you expect to be able to sell a share of Acap stock in one year?
c. Given your answer in (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 (a)?
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?
If you plan to hold the stock for two years, the price you would pay for a share of Acap stock today is
$_____ (Round to the nearest cent.)
Part 2
b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year?
The price for which you expect to sell a share of Acap stock in one year is $_______
(Round to the nearest cent.)
c. Given your answer in (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 (a)?
Given your answer in (b), the price you would be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year is $_______
(Round to the nearest cent.)
Part 4
When you compare your answer in (a) to the answer in (c),
Transcribed Image Text:Suppose Acap Corporation will pay a dividend of $2.75 per share at the end of this year and $2.95 per share next year. You expect Acap's stock price to be $51.61
in two years. Assume that Acap's equity cost of capital is 11.8%.
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. For what price would you expect to be able to sell a share of Acap stock in one year?
c. Given your answer in (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 (a)?
If you plan to hold the stock for two years, the price you would pay for a share of Acap stock today is $ (Round to the nearest cent.)
b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year?
The price for which you expect to sell a share of Acap stock in one year is $ Round to the nearest cent.)
c. Given your answer in (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 (a)?
Given your answer in (b), the price you would be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year is $ (Round to
the nearest cent.)
When you compare your answer in (a) to the answer in (c), (Select the best choice below.)
b)
O A. The price in part (a) is the same as the price in part (c).
O B. The price in part (a) is lower than the price in part (c).
OC. The price in part (a) is higher than the price in part (c).
ur
O D. They are not comparable values.
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