The One-Period Motel is planning on going out of business exactly one year from now. At that time, each of its shares of stock will pay a liquidating dividend. The liquidating dividend has the following probability distribution of possible outcomes:

Probability Liquidating Dividend

=o) $25 A $50 ra) $75 Required:

1, What is the expected liquidating dividend—E(DIV)? Show your work.

2. If investors are willing to pay $40 per share today for One-Period’s stock, what will be the expected rate of return on their investment?

3. If investors can get an expected rate of return of 20% on another investment with risk equal to that of One-Period’s stock, should they pay $40 for a share of One-Period’s stock? Why or why not?