What price would an individual be willing to pay today for a stock he/she expects can be sold for $200 one year from now, if the individual has a discount rate of 6% (.06) and the stock pays an annual dividend of $7.50?
What will be an ideal response?
We can use the following formula to determine the price of the stock today:
Ptoday = 
+ 
Based on the information provided in the question, the Dnextyear = $7.50; the Pnextyear = $200; and the i = 0.06. With these values plugged into the equation, we determine the Ptoday to be $195.75.
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