Answer:
P₀ = $ 81.51
Explanation:
given,
common stock = $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years.
require rate of return = 12%
Amount payable = ?
Price
[tex]P_O = \dfrac{P_1}{1 + r}+ \dfrac{P_2}{(1 + r)^2} +\dfrac{P_3}{(1 + r)^3}[/tex]
[tex]P_O = \dfrac{3}{1 + 0.12}+ \dfrac{4.25}{(1 + 0.12)^2} +\dfrac{100 +6}{(1 + 0.12)^3}[/tex]
[tex]P_O = \dfrac{3}{1.12}+ \dfrac{4.25}{(1.12)^2} +\dfrac{106}{(1.12)^3}[/tex]
[tex]P_O = \dfrac{3}{1.12}+ \dfrac{4.25}{1.2544} +\dfrac{106}{1.405}[/tex]
P₀ = $ 81.51
The investment would be equal to P₀ = $ 81.51
