You believe WSU shares will pay dividends of $1.00, $1.25 and $1.50 at the end of each of the next three years.Immediately after receiving the third dividend, you will sell the shares for $28.50.If the appropriate discount rate is 12%, you should be willing to pay $20.75 for these shares.

Question

Quizplus · Accepted Answer

To calculate the present value of the three dividends and the sale price, we can use the formula:

PV = (D1/(1+r)^1) + (D2/(1+r)^2) + (D3/(1+r)^3) + (Sale price/(1+r)^3)

where PV is the present value, D1, D2, and D3 are the dividends in years 1, 2, and 3, r is the discount rate, and the sale price is the price at which the shares will be sold after the third dividend is received.

Substituting the values given in the problem, we get:

PV = (1/(1+0.12)^1) + (1.25/(1+0.12)^2) + (1.5/(1+0.12)^3) + (28.5/(1+0.12)^3)

PV = 0.8929 + 1.0105 + 1.0861 + 17.5735

PV = 20.5629

Therefore, the present value of the dividends and the sale price is $20.5629, which is higher than the price of $20.75 that we should be willing to pay. Therefore, we should be willing to buy the shares at that price.

You Believe WSU Shares Will Pay Dividends of $1