An investor is contemplating the purchase of ordinary shares at the beginning of this year and to hold the shares for one year.The investor expects the year-end dividend to be $2.00 and expects a year-end price for the shares of $40.If this investor's required rate of return is 10%, then the value of the shares to this investor is [blank].

Question

Quizplus · Accepted Answer

To value the shares, we can use the dividend discount model:
Value of shares = (Expected dividend / Required rate of return) + Expected price at the end of the year / (1 + Required rate of return)

Thus, the value of the shares to this investor is:
(2 / 0.1) + 40 / (1 + 0.1) = 20 + 36.36 = $56.36

However, since the investor plans to hold the shares for only one year, the value needs to be adjusted for the expected dividend and price at the end of the year.

Adjusted value of shares = Expected dividend / (1 + Required rate of return) + Expected price at the end of the year / (1 + Required rate of return)

= 2 / 1.1 + 40 / 1.1 = $1.81 + $36.36 = $38.18

Therefore, the answer is B.

An Investor Is Contemplating the Purchase of Ordinary Shares at the Beginning