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 $1.65 in dividends and $25 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 11% return.

Answer 1

Answer:

Present value = $24.009009 rounded off to $24.01

The maximum price that should be paid for a share today is $24.01

Explanation:

To calculate the price of the stock today that should be paid, we can use the discounted cash flow approach. It calculates the value of stock today based on the present value of future values of cash flows that are expected from the stock. Thus the present value of a stock that is expected to pay a dividend and sell for a given price in 1 year can be calculated as follows,

Present Value = [D1 + P1] / (1+r)

Where,

• D1 is the next dividend expected from the stock
• P1 is the price of the stock in 1 year
• r is the required rate of return

Present value = [1.65 + 25] / (1+0.11)

Present value = $24.009009 rounded off to $24.01