SOLUTION: The current share price of a stock is $95.00. The stock will pay an annual dividend of $7.00 in the following 3 years. The first dividend will be paid one year from now. The contin

Algebra ->  Finance -> SOLUTION: The current share price of a stock is $95.00. The stock will pay an annual dividend of $7.00 in the following 3 years. The first dividend will be paid one year from now. The contin      Log On


   

Question 1191925: The current share price of a stock is $95.00. The stock will pay an annual dividend of $7.00 in the following 3 years. The first dividend will be paid one year from now. The continuous compounding interest rate is 4%. Determine the forward price of the forward contract that matures in 3 years. Round your answer to the nearest dollar.
Answer by ikleyn(52785) About Me  (Show Source):
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The current share price of a stock is $95.00.
The stock will pay an annual dividend of $7.00 in the following 3 years.
The first dividend will be paid one year from now.
The continuous compounding interest rate is 4%.
Determine the forward price of the forward contract that matures in 3 years.
Round your answer to the nearest dollar.
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Make a Table


    Year    make                   pay            Balance
            compounding            dividend


      1     95*2.71828^0.04        98.88 - 7      = 91.88
            = 98.88


      2     91.88*2.71828^0.04     95.63 - 7      = 88.63
            = 95.63


      3     88.63*2.71828^0.04     92.25 - 7      = 85.25
            = 92.25


ANSWER.  After 3 years, the stock is $85.25; the total dividend paid in 3 years is $21.

         The total price is  $85.25 + $21 = $106.21.


         Round as you want.