Question

You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 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 13% return. A) $32.08 B) $41.67 C) $31.54 D) $30.97

Answer 1

Answer:

A. $32.08

Explanation:

Dividend=$1.25

Capital gain after one year=$35

Rate of return=13%

Formula for this will be;

Share price=(dividend+capital gain)/(1+rate of return)

Share price=(1.25+35)/(1+.13)

Share Price=36.25/1.13

Share price=32.08

Answer 2

Answer:

A) $32.08

Explanation:

to determine the maximum amount that we are willing to pay for the stock we can use the present value formula:

present value = future value / (1 + r)ⁿ

• future value = $1.25 + $35 = $36.25
• r = 13%
• n = 1

present value = $36.25 / (1 + 13%)¹ = $36.25 / 1.13 = $32.079 ≈ $32.08

The present value is useful for determining the value of money in time, since $1 today is worth more than $1 tomorrow. It can be solved to determine the future value, interest rate or number of periods.