Suppose Acap Corporation will pay a dividend of $2.88 per share at the end of this year and $3.01 per share next year. You expect Acap's stock price to be $53.87 in two years. Assume that Acap's equity cost of capital is 10.3%. a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year? c. Given your answer in (b), what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one year? How does this compare to your answer in (a)?

A.P(0)=$48.89

B.P(1)=$51.56

C.P(0)=$49.35

Explanation:

A. Calculation for what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for two year

Using this formula

P(0)=Dividend per share/Percentage of Equity cost of capital +(Dividend next year+Stock price)/Percentage of Equity cost of capital

Let plug in the formula

P(0) = 2.88/ 1.103 + (3.01+ 53.87) / 1.103^2=

P(0)=2.611+56.88/1.216609

P(0)=59.491/1.216609

P(0)=$48.89

b. Calculation for what price would you expect to be able to sell a share of Acap stock in one year

Using this formula

P(1)=(Dividend next year + Stock price)/Percentage of Equity cost of capital

Let plug in the formula

P(1) = (3.01 + 53.87) / 1.103 = $50.00

P(1)=56.88/1.103

P(1)=$51.56

c.Calculation for what price would you be willing to pay for a share of Acap stock today if you planned to hold the stock for one year

Using this formula

P(0)=(Dividend per share + P(1)/Percentage of Equity cost of capital

Let plug in the formula

P(0) = (2.88 + 51.56) / 1.103

P(0)=54.44/1.103

P(0)=$49.35

Therefore compare to the answer in (a)

if you planned to hold the stock for two year you will have $48.89 and if you planned to hold the stock for one year you will have $49.35.