Suppose You Plan to Hold a Stock for One Year

question 117

Multiple Choice

Suppose you plan to hold a stock for one year.You expect that,in one year,it will sell for $30 and pay a dividend of $3 per share.If your required return on equity is 10%,what is the most you should be willing to pay for the share today?

• A) $3.30
• B) $23
• C) $30
• D) $33

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Definitions:

Market Rate of Return

The average or expected rate of return on an investment in the market.

Tax Rate

The rate determining the tax payment required from a person or a corporation’s earnings.

Weighted Average Cost of Capital

A calculation of a firm’s cost of capital in which each category of capital is proportionately weighted, including equity, debt, and other forms of financing.

Market Risk Premium

The extra return investors demand for taking the risk of investing in stocks over a risk-free asset.