The price of consolidated everything is now $75. The company pays no dividends. Ms. Bossard expects the price 3 years from now to be $100 per share. should Ms. Bossard buy Consolidated e. if she desires a 10% rate of return?explain
We'll be glad to check your figures on this problem.
i don't even know where to start on this problem
Take 10% of $75. Add it to $75. Is it more or less than $100?
its less, 82.50
So -- this must be a reasonable investment since he expects the price of the stock to be more than $82.50.
Ah, but remember, the expected $100 is 3 years hence. Is $75 compounded over 3 years at 10% greater than 100?
To determine whether Ms. Bossard should buy Consolidated Company's stock, we need to calculate the present value of the stock using the information provided.
The present value of an asset is the current value of its future cash flows, discounted at a specific rate of return. In this case, Ms. Bossard desires a 10% rate of return.
Here's how you can calculate the present value of Consolidated Company's stock:
1. First, determine the future value of the stock in 3 years. We are given that the expected price per share in 3 years is $100.
2. Next, calculate the future value with the 10% rate of return. We'll use the future value formula:
Future Value = Present Value * (1 + Rate of Return)^Number of Years
Plugging in the values:
$100 = Present Value * (1 + 0.10)^3
3. Rearrange the formula to solve for the present value (the current stock price):
Present Value = Future Value / (1 + Rate of Return)^Number of Years
Plugging in the values:
Present Value = $100 / (1 + 0.10)^3
Present Value = $100 / (1.10)^3
Present Value = $100 / 1.331
4. Calculate the present value:
Present Value = $75.19 (rounded to two decimal places)
Since the calculated present value ($75.19) is less than the current stock price ($75), Ms. Bossard should not buy Consolidated Company's stock. The present value is lower than the current price, indicating that the stock may not be a good investment at the desired rate of return.