If investors expect a 15% rate of return on their investment, they will be indifferent between a $1.00 dividend received immediately or
A)$1.15 received at the end of the year.
B)$1.00 received later.
C)$0.87 received at the end of the year.
D)$1.00 increase in the share price a year later.

Question

Quizplus · Accepted Answer

Investors would prefer to receive $1.15 at the end of the year because they would earn a 15% return on their investment. Therefore, a $1.00 dividend received immediately would have to offer an expected return equal to 15% in order for investors to be indifferent between the two options. $1.00 x 1.15 = $1.15, so option A is the best choice. Option B would be worth less than $1.00 due to the time value of money. Option C would be worth only $0.87 due to the time value of money and the fact that it is lower than the $1.00 dividend. Option D is unclear because an increase in share price does not guarantee a 15% return.

If Investors Expect a 15% Rate of Return on Their