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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 14, Problem 4PA
Textbook Problem
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Your bank account pays an interest rate of 8 percent. You are considering buying a share of stock in XYZ Corporation for $110. After 1, 2, and 3 years, it will pay a dividend of $5. You expect to sell the stock after 3 years for $120. Is XYZ a good investment? Support your answer with calculations.

To determine
Present value.

Explanation of Solution

Present value of the cash flow from the stock can be calculated as follows:

Present value=Cah flowYear 1(1+Interest)1+Cah flowYear 2(1+Interest)2+...+Cah flowYear n(1+Interest)n=5(1+0

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