Question: You are considering purchasing a stock with a $100 per year dividend and expected price in two years of $500. Your personal required return is

You are considering purchasing a stock with a $100 per year dividend and expected price in two years of $500. Your personal required return is 15%. This is only two periods, so do not drop out the expected selling price as you would for a long holding period. a) What is your personal willingness to pay for this stock? b) The current market price of this stock is $600. Should you buy it? c) Now keep the current market price, expected price, holding period, and personal required return constant. Solve for the break-even dividend (e.g. the dividend at which you are in-different between buying and not buying the stock today) assuming the dividend is constant over time. d) Now assume the initial dividend is $120. What is the growth rate necessary in the Gordon model for you to buy the stock? e) Finally, assume you buy the stock at the price and conditions you found in part (a) and sell it at $500. What is your rate of return?

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