You are trying to determine the appropriate price to pay for an ordinary share.If you purchase this share, you plan to hold it for 1 year.At the end of the year you expect to receive a dividend of R5.50 and to sell the share for R154.The appropriate rate of return for this share is 16 percent.What should be the current price of this share?

Question

Quizplus · Accepted Answer

The current price of the share can be calculated using the formula for the present value of expected future cash flows: P0 = (D1 + P1) / (1 + r), where D1 is the expected dividend, P1 is the expected selling price, and r is the required rate of return. Substituting the given values: P0 = (5.50 + 154) / (1 + 0.16) = 137.50.

You Are Trying to Determine the Appropriate Price to Pay