Practice

Free response question

Financial literacy · Hard · 30 marks

EO past paper: 2025 International Final, Part A

Section C (30 points). Shelly is considering two options. The first option is to leave $55 in her bank account which pays an interest rate of 4%. The second option is to buy a share of stock in XY Corporation for $55. After the first, second and third years, it will pay a dividend of $2.5. She expects to sell the stock after three years for $60.

(a)Using net present value calculate whether Shelly should buy the stock in XY or keep her money in the bank. Assume that the discount rate is 4%.[15](b)If the dividends were $1.5 per stock after the first, second and third years, would that change your response? Assume that the discount rate is 4%.[15]

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