Question

Valorous Corporation will pay a dividend of $1.80 per share at this year's end and a dividend of 2.40 per share at the end of next year. It is expected that the price of Valorous' stock will be 44 per share after two years. If Valorous has an equity cost of capital of 8%, what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today? A. A) $39.27 B. B) $40.22 C. C) $41.45 D. D) $42.40

Answer 1

Answer:

C) $41.45

Explanation:

Valorous Corporation

Using a financial calculator

CF0 = 0

CF1 = 1.8

CF2 = (44 + 2.4) = 46.4

Hence calculate NPV at I = 8%,

=$41.45.

Therefore the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today will be

$41.45