Suppose Acap Corporation will pay a dividend of 271 per sha

Suppose Acap Corporation will pay a dividend of $ 2.71 per share at the end of this? year, and $ 2.95 per share next year. You expect? Acap\'s stock price to be $ 52.69 in two years. If? Acap\'s equity cost of capital is 11.9 % ?: 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. What price would you expect to be able to sell a share of Acap stock for in one? year? c. Given your answer in part ?(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 part ?(a?)? ?(Note: It is best not to round intermediate calculations? - make sure to carry at least four decimal places in intermediate? calculations.)

Solution

(a)

Stock price ($) = Present value of future dividends + Present value of stock price

= 2.71 x P/F(11.9%, 1) + (2.95 + 52.69) x P/F(11.9%, 2)

= 2.71 x 0.8937** + 55.64 x 0.7986** = 2.4219 + 44.4341

= 46.8560

(b) If I plan to sell stock after one year,

Expected selling price = Present value of future dividend + Present value of stock price

= (2.95 + 52.69) x P/F(11.9%, 1)

= 55.64 x 0.8937**

= 49.7255

(c)

Price I\'m willing to pay ($) = 49.7255 x P/F(11.9%, 1) = 49.7255 x 0.8937**

= 44.4397

This price is less than the price I\'m willing to pay in part (a). This is because I am giving up one year\'s dividend by holding the stock for one period instead of two.

**P/F(r%, N) = (1 + r)^-N

P/F(11.9%, 1) = (1.119)^-1 = 0.8937

P/F(11.9%, 2) = (1.119)^-2 = 0.7986