Consider a share of stock in a company that will pay a dividend of $20 one year from today and immediately liquidate its assets. Your expected share of the liquidated assets is $5. Your time value of money is such that you consider $1.05 a year from today is equivalent to $1.00 today. What is the maximum you would be willing to pay for a share of stock in this company?​ a.​$25.00 b.​$17.39 c.​$23.81 d.$20.00  2. An example of a currency board regime might be if the United States were to pledge to  a.​undertake an intervention in the currency market if the US dollar approaches the lower bound. b.​convert or exchange US dollars for the euro at any time at a stated fixed price because the euro is the anchor currency of the US dollar.   c.​undertake an intervention in the currency market if the US dollar approaches the upper bound. d.​undertake an intervention in the currency market if the euro approaches either the upper or lower bound.

Question
Asked Nov 20, 2019
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  1. Consider a share of stock in a company that will pay a dividend of $20 one year from today and immediately liquidate its assets. Your expected share of the liquidated assets is $5. Your time value of money is such that you consider $1.05 a year from today is equivalent to $1.00 today. What is the maximum you would be willing to pay for a share of stock in this company?​
      a.
    ​$25.00
      b.
    ​$17.39
      c.
    ​$23.81
      d.
    $20.00

     

     

    2. An example of a currency board regime might be if the United States were to pledge to
     
      a.
    ​undertake an intervention in the currency market if the US dollar approaches the lower bound.
      b.
    ​convert or exchange US dollars for the euro at any time at a stated fixed price because the euro is the anchor currency of the US dollar.  
      c.
    ​undertake an intervention in the currency market if the US dollar approaches the upper bound.
      d.
    ​undertake an intervention in the currency market if the euro approaches either the upper or lower bound.
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Expert Answer

Step 1

Expected Dividend = $20

Expected Share in Liquidated Assets = $5

Total Expected Return (fv) = $20 + $5 = $25

Value of $1 after 1 Year is $1.05, therefore the present value factor is 0.05

 

Calculation of the present value of return is as follows:

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Total Expected Return Present Value of Retun 1+Present Value Factor $25 1+0.05 $25 1.05 = $23.81

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Step 2

The present value of the returns is highest amount we will be willing to pay for the purchase o the share of a company.

Hence, the option C is correct.

Step 3

Currency Board:

 

Currency Board is a medium or institution that helps countries to convert their currencies at a fixed rate into a reserved asset. The currency board should have 100% reserves of foreign currency which provides full convertibility.

...

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