Bill,Jim and Shelly Are All Looking to Buy the Same

question 67

Multiple Choice

Bill,Jim and Shelly are all looking to buy the same stock that pays dividends.Bill plans on holding the stock for one year.Jim plans on holding the stock for three years.Shelly plans on holding the stock until she retires in 10 years.Which one of the following statements is correct?

• A) Bill will be willing to pay the most for the stock because he will get his money back in one year when he sells.
• B) Jim should be willing to pay three times as much for the stock as Bill because his expected holding period is three times as long as Bill's.
• C) Shelly should be willing to pay the most for the stock because she will hold it the longest and hence she will get the most dividends.
• D) All three should be willing to pay the same amount for the stock regardless of their holding period.

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Definitions:

Relevant Costs

Costs that are pertinent to a particular decision-making process, which differ among alternatives.

Traceable Fixed Expenses

Fixed costs that can be directly linked to a specific product, department, or segment of a company, making it easier to allocate expenses accurately.

Common Fixed Expenses

Expenses shared across different departments or product lines within a company that do not change with production or sales volume.

Sales Dollars

A measurement of revenue generated from sales activities, expressed in the currency of dollars.