Suppose you are considering buying an IKEA stock this year

Economics Nov 04, 2020

Suppose you are considering buying an IKEA stock this year. You know that an IKEA stock pays a dividend of $10 next year and you know you can sell it then for $5. You can always invest your money in a bank account for 2% return instead of buying stock. How much should you buy the stock for this year(that is, the maximum price)? Explain your reasoning.

Expert Solution

Maximum price of stock = Present value of future cash flows

= $10 x P/F(2%, 1) + $5 x P/F(2%, 1)

= $(10 + 5) x 0.9804**

= $15 x 0.9804**

= $14.71

**From P/F factor table

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