An investor expects to receive 5 TL of dividend income from an equity investment and will probably sell that equity after 1 year at a price of 40 TL

Finance Jan 13, 2021

An investor expects to receive 5 TL of dividend income from an equity investment and will probably sell that equity after 1 year at a price of 40 TL. The expected rate of return for this investor is 25%. What should be the price that the investor would pay for the equity right now?

A)28

B)36

C)45

D)56

Expert Solution

Calculation of price that the investor would pay for the equity right now:

Price = Dividend / (rate - growth rate)

40 TL = 5 TL / (25% - growth rate)

25% - growth rate = 5 TL / 40 TL

growth rate = 12.5%

Price that the investor would pay = Price / 1+growth rate = 40 / (1+12.5%) = 40 / 1.125 = 36

Hence option B is the correct answer

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