You want to invest in a stock that pays $3.50 annual cash dividends for the next six years. At the end of the six years, you will sell the stock for $22.50. If you want to earn 12.5% on this investment, what is a fair price for this stock if you buy it to
A) about $25.94
B) about $25.29
C) about $12.45
D) about $14.25
Answer: B
Explanation: B) The fair price is the present value of the selling price plus the present value of the dividend stream. Thus, today's price (P) = (future price × PVIF) + (dividend stream × PVIFA)
= ($22.50 × 0.493270) + ($3.5 × 4.053838) = $11.099 + $14.188 = $25.287, or about $25.29.
MODE = END
INPUT 6 12.5 ? -3.5 -22.5
KEY N I/Y PV PMT FV
CPT 25.29
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