Suppose you are willing to pay R30 today for a share which you expect to sell at the end of one year for R32.If you require an annual rate of return of 12 percent, what must be the amount of the annual dividend which you expect to receive at the end of Year 1?

Question

Quizplus · Accepted Answer

Using the formula for the present value of a stock:
PV = D/(1+r) + P/(1+r)
where PV is the present value, D is the dividend, r is the annual rate of return, and P is the selling price at the end of Year 1.

Substituting the given values:
30 = D/(1+0.12) + 32/(1+0.12)
30 = D/1.12 + 28.57
D/1.12 = 1.43
D = 1.43 * 1.12
D = 1.60

Therefore, the amount of the annual dividend which you expect to receive at the end of Year 1 is R1.60. Choice C is the correct answer.

Suppose You Are Willing to Pay R30 Today for a Share