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You expect Bailey Company's common stock to pay a dividend of $2
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 12%. For what price would you need to sell your stock in one year in order to earn your required rate of return? O $57.92 O $54.80 O $55.84 O $57.40 $56.88
Expert Solution
The stock price today = $52
To earn 12% return, the amount earned should be = 12% of 52
= 0.12 * 52 = $ 6.24
Out of this, amount earned through dividend is = $2.4
Hence the increase in stock price should be 6.24 - 2.4 = $3.84 to earn 12% return
Price after one year = 52 + 3.84 = $55.84
Answer = $55.84
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