Which of the following must be estimated to determine the value of a stock that is to be held for one year?
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A. B. C. D.A
In order to determine the value of a stock that is to be held for one year, dividends, the required rate of return and the expected sale price must be estimated.
To determine the value of a stock that is to be held for one year, several factors need to be estimated. Let's analyze each answer choice and its significance:
A. All of these answers: This choice suggests that all the options listed-required rate of return, dividends, and expected sale price-must be estimated to determine the stock's value. This option implies that all the factors are interdependent and collectively contribute to the stock's overall value.
B. Required rate of return: The required rate of return is the minimum rate of return that an investor expects to earn on an investment to compensate for the risk taken. It is also known as the discount rate or hurdle rate. Estimating the required rate of return is crucial because it is used to discount the future cash flows associated with the stock to their present value. By discounting the expected cash flows, we can assess the current value of the stock.
C. Dividends: Dividends represent the portion of a company's earnings that is distributed to shareholders. Estimating dividends is essential because they provide a direct cash flow to the investor. Dividends can be regular (paid periodically, such as quarterly) or special (one-time payments). To determine the value of a stock held for one year, you would need to estimate the expected dividends over that period.
D. Expected sale price: The expected sale price refers to the price at which the stock is anticipated to be sold after one year. Estimating the expected sale price is significant because it reflects the investor's assumption about the stock's future price appreciation or depreciation. The sale price, along with the dividends received during the holding period, contributes to the total return on the investment.
Based on the above analysis, the correct answer is A. All of these answers. Estimating the required rate of return, dividends, and expected sale price collectively allows us to determine the value of a stock held for one year. Each of these factors plays a crucial role in the valuation process and provides a comprehensive understanding of the stock's worth.