Suppose in any period the dividend on a share takes one of four values: $0.00, $0.04, $0.14 or $0.30 with equal probability in each period and trades for 15 periods after which it becomes valueless. At the beginning of the 1^st period, the expected dividend from this share is: A) $0.75. B) $3.60. C) $1.80. D) $0.15.

Question

Quizplus · Accepted Answer

The expected dividend for each period is calculated by taking the average of the possible dividends since they all have equal probability. Thus, $ \text{Expected dividend per period} = \frac{0.00 + 0.04 + 0.14 + 0.30}{4} = 0.12 $. Since the share trades for 15 periods, the total expected dividend is $ 0.12 \times 15 = 1.80 $.

Suppose in Any Period the Dividend on a Share Takes