For a particular share a dividend of 20p will be paid after 1 year, at which time the share is expected to be sold for 250p. If the risk class justifies a rate of return of 20 per cent, how much should an investor pay for the shares today?
A) 240p
B) 250p
C) 225p
D) 275p

Question

Quizplus · Accepted Answer

To calculate the present value of the share, we need to use the formula:

Present Value = Dividend / (1 + rate of return) + Future Value / (1 + rate of return) ^ n

where n is the number of years until the future value is received.

In this case, n = 1 year, and the values are: 
Dividend = 20p 
Future Value = 250p 
Rate of Return = 20%

Plugging these values into the formula, we get:

Present Value = 20p / (1 + 0.20) + 250p / (1 + 0.20) ^ 1 
Present Value = 16.67p + 208.33p 
Present Value = 225p

Therefore, an investor should pay 225p for the shares today.

For a Particular Share a Dividend of 20p Will Be