Wild Acre Metals has ordinary shares that paid a dividend of $1.00 a share last year.You expect the share to grow at 5% per year.If the appropriate rate of return on this share is 12%,how much are you willing to pay for the share today?

Question

Quizplus · Accepted Answer

To calculate the present value of the share, we need to use the dividend discount model:

PV = D / (r - g)

Where PV is the present value, D is the dividend, r is the appropriate rate of return, and g is the expected growth rate.

PV = 1 / (0.12 - 0.05) 
PV = 1 / 0.07 
PV = 14.29

Therefore, the maximum price that you should pay for the share is $14.29. Since the choices are all rounded to the nearest dollar, the best choice is B ($15.00).

Wild Acre Metals Has Ordinary Shares That Paid a Dividend