You expect Bailey Company's common stock to pay a dividend of $2

Finance Dec 22, 2020

You expect Bailey Company's common stock to pay a dividend of $2.40 one year from now. You can buy the stock now for $52, and you plan to sell the stock at the end of one year. Given the risk of the stock, your required rate of return is 16%. For what price would you need to sell your stock in one year in order to earn your required rate of return?

Expert Solution

Required return=(End value-Beginning value+Dividend)/Beginning value

0.16=(End value-52+2.4)/52

(0.16*52)=(End value-52+2.4)

8.32=End value-49.6

End value=8.32+49.6

=$57.92

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