You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for one year.You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year.The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return.

Question

Quizplus · Accepted Answer

To calculate the maximum price we can pay for the share today, we need to use the formula for the present value of a stock:
PV = D1/(1+r) + P/(1+r)
where:
PV = present value
D1 = expected dividend at the end of the year
r = desired rate of return
P = expected selling price of the share

Plugging in the values we have:
PV = 1.25/(1+0.12) + 35/(1+0.12) = 1.1161 + 31.2528 = 32.37

Therefore, the maximum price we would pay for the share today to earn a 12% return is $32.37. Choice B is the correct answer.

You Are Considering Acquiring a Common Share of Sahali Shopping