Q1 (5 Points). (i). Consider stock shares having the following characteristics:

Question

Q1 (5 Points). (i). Consider stock shares having the following characteristics: The annual dividend paid per share is D, the expected share price at the end of next year is P1; let PO denote the current share price (at the beginning of the period), and the required return on equity investment is k. According to the one-period stock valuation model (with one period- one year), PO should satisfy the formula: A. PO (D+P1)*k) B, PI-P0 = D/( 1 + k) C. PI = (P0 + D)"k D, P0 = (D + P1)/(1+k) (ii). Explain why. (Hint: Use the simple return formula to derive POi) 3 points] 0 [() 2 points]

Explanation / Answer

k=dividend growth +share capital

=d/P0+(p1-p0)/p0

=(d+p1-p0)/p0

kp0=d+p1-p0

(k+1)p0=d+p1

so,p0=(d+p1)/(1+k)

so answer is A

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