: The Crescent Corporation just paid a dividend of $2 per share and is expected to continue paying the same amount each year for the next 4 years. If you have a required rate of return of 13%, plan to hold the stock for 4 years, and are confident that it will sell for $30 at the end of 4 years, how much should you offer to buy it at today?

Part C: Use the information in the following table to answer the questions below.

State of Economy Probability of State Return on A in State Return on B in State Return on C in State
Boom .35 0.040 0.210 0.300
Normal .50 0.040 0.080 0.200
Recession .15 0.040 -0.010 -0.260

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To determine how much you should offer to buy the stock today, you can calculate its present value using the dividend discount model.

The dividend discount model states that the present value of a stock is equal to the sum of the present value of its future dividends and the present value of its expected future selling price.

First, let's calculate the present value of the future dividends. The dividend for each year is $2, and the required rate of return is 13%. We can use the formula for the present value of a future cash flow:

PV = CF / (1 + r)^n

where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of years.

PV_dividends = $2 / (1 + 0.13)^1 + $2 / (1 + 0.13)^2 + $2 / (1 + 0.13)^3 + $2 / (1 + 0.13)^4

Next, let's calculate the present value of the expected future selling price. The expected selling price in 4 years is $30. Using the same formula:

PV_selling_price = $30 / (1 + 0.13)^4

Now, add the present values of the dividends and the selling price to get the present value of the stock:

PV_stock = PV_dividends + PV_selling_price

Finally, the amount you should offer to buy the stock today is equal to its present value.

Now let's move on to Part C of your question. The table provides the probabilities of different states of the economy and the corresponding returns on three different stocks (A, B, and C).

To answer the questions using the table, we need to consider the expected returns and probabilities. Expected return is calculated by multiplying the return on each stock in a given state by the probability of that state, and then summing the results.

For example, to calculate the expected return for Stock A:

Expected return for Stock A = (Return on A in Boom state * Probability of Boom state) + (Return on A in Normal state * Probability of Normal state) + (Return on A in Recession state * Probability of Recession state)

Repeat this process for Stocks B and C to calculate their expected returns.

Now you have the expected returns for each stock. You can then compare them to make investment decisions. Remember to also consider the risks associated with each stock, as indicated by the variation in returns across different states of the economy.