Question

JJ Industries will pay a regular dividend of $2.40 per share for each of the next four years. At the end of the four years, the company will also pay out a $40 per share liquidating dividend, and the company will cease operations. If the discount rate is 10 percent, what is the current value of the company’s stock?

Answer 1

Answer:

$34.93

Explanation:

The current price of JJ Industries' stocks is:

stock price = (n dividends / rⁿ) + (liquidating dividend / rⁿ)

stock price = ($2.40 / 1.1) + ($2.40 / 1.1²) + ($2.4 / 1.1³) + ($2.4 / 1.1⁴) + ($40 / 1.1⁴)

stock price = $2.18 + $1.98 + $1.80 + $1.64 + $27.32 = $34.93