You are considering acquiring a common share of Sahali Shopping Centre 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 achieve a 12% return, we need to calculate the present value of the expected future cash flows (dividend and sale price). Using the formula for present value of a stock:
PV = D/(1+r) + P/(1+r)
where PV is the present value, D is the expected dividend, r is the required rate of return, and P is the expected sale price. 
Plugging in the values, we get:
PV = 1.25/(1+0.12) + 35/(1+0.12)
PV = 1.1161 + 31.2587
PV = 32.3748
Therefore, the maximum price we would pay for the share today is $32.37 (rounded to the nearest cent). 
Option B is the correct answer.

You Are Considering Acquiring a Common Share of Sahali Shopping