When the Stock Price Is 20 and the Present Value

question 12

Multiple Choice

When the stock price is 20 and the present value of dividends is 2,which of the following is the recommended way of constructing a tree?

• A) Draw a tree for an initial stock price of 20 and subtract the present value of future dividends at each node
• B) Draw a tree for an initial stock price of 22 and subtract the present value of future dividends at each node
• C) Draw a tree with an initial stock price of 18 and add the present value of future dividends at each node
• D) Draw a tree with an initial stock price of 18 and add 2 at each node

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Definitions:

AASB 10/IFRS 10

An Australian/international financial reporting standard that establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

Consolidated Financial Statements

Financial statements that show the financial position and results of operations for a parent company and its subsidiaries as one economic entity.

Elements of Control

Factors or conditions that grant an entity the power to govern the financial and operating policies of another entity, typically to benefit from its activities.

Relevant Activities

Activities that significantly affect the returns of an investment or project under consideration.