Which of the following values is closest to the amount that should be paid for a share that will pay a dividend of €10 in one year and €11 in two years? The share will be sold in 2 years for an estimated price of €120.The appropriate discount rate is 9%.

Question

Quizplus · Accepted Answer

To find the amount that should be paid for the share, we need to calculate the present value of all future cash flows using the appropriate discount rate of 9%.

PV of dividend in Year 1 = €10 / (1 + 0.09)^1 = €9.17
PV of dividend in Year 2 = €11 / (1 + 0.09)^2 = €9.49
PV of sale price in Year 2 = €120 / (1 + 0.09)^2 = €98.35

Total PV = €9.17 + €9.49 + €98.35 = €117.01, which is closest to Choice B: €119.43.

Which of the Following Values Is Closest to the Amount