Question

Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)

Answer 1

Answer:

$10.76

Step-by-step explanation:

Present dividend, $D_{1}$ is $2.5

Expected dividends for the next 1, 2, 3 and 4 years denoted by $D_{2}$, $D_{3}$, $D_{4}$, $D_{5}$, respectively will be

$D_{2}$ =$2.5(1+0.07)=$2.675

$D_{3}$ =$2.675(1+0.07)=$2.86225

$D_{4}$ =$2.86225(1+0.07)=$3.0626075

$D_{5}$ =$3.0626075(1+0.07)=$3.276990025

Present value will be

$2.5/(1.1)^{1} + 2.675/(1.1)^{2} + 2.86225/(1.1)^{3} + 3.0626075/(1.1)^{4} + 3.276990025/(1.1)^{5}$

$2.272727273 + $2.210743802 + $2.150450789 + $2.091802131 + $2.034752982 = $10.76047698

Rounded off to 2 decimal places we get $10.76