Answer :
The fair price for this stock now, if you want to earn 10% on your investment is $40.
The overall returns on equity or stock can be divided into two categories of gains: dividend gains and capital gains or losses. While the capital gain or loss depends on the difference between the purchase price and the selling price, the dividend gain is dependent on the company's payout policy.
If the stock were to be purchased today, its calculated fair price would be $40.
If the stock is sold after five years, the overall gain in percentage is calculated as follows:
= Annual gain in percentage × number of years
= 10% × 5
= 50%
The total dividends amount is given by:
= Annual dividend × number of years
= $6 × 5
= $30
The following provides the stock's current fair value:
= (Total dividends + selling price)/(1 + total gain in percentage)
= [tex]\frac{(30 + 30)}{(1 + 50)}[/tex]
= $60/1.5
= $40
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