What Would You Pay for a Stock Whose Price You

question 22

Multiple Choice

What would you pay for a stock whose price you estimate will be $50 in 10 years and you wish to earn a return on the investment of 9% per year? Ignore brokerage commissions and tax implications and assume the stock pays no dividends during the holding period.

• A) $45
• B) $41
• C) $21.10
• D) $15

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Definitions:

Desired Rate

Typically refers to the target interest rate set by individuals or businesses for financial returns or lending activities.

Average Rate of Return

An investment's return, expressed as a percentage, which is calculated by dividing the average annual profit by the initial investment cost.

Cash Payback Method

An analysis technique to determine the time needed to recoup the initial investment in a project, based on cash flows.

Advantage

A favorable or beneficial condition, circumstance, or position that contributes to success.