Question

Barn Wood Interiors announced today that it is going out of business. As of today, no more regular dividends will be paid. The firm will, however, pay two liquidating dividends. The first will be paid one year from now in the amount of $14 a share. The second and final payment will be paid two years from now at an estimated $38 a share. What is the value of this stock today at a discount rate of 18.7 percent?

Answer 1

Answer:

The stock price today is $38.76 as shown below

Explanation:

The value of the stock today is the present value of all future dividend payments from the stock.

Present value of first dividend=$14/(1+18.7%)^1

                                                  =$11.79443976

Present of second dividend=$38/(1+18.7%)^2

                                              =$26.97007528

The stock price today is the sum of the present values=11.79443976 +26.97007528 =$38.76

Ordinarily, the valuation would have included the price at which the stock could be sold but since the company is wounding up and the only cash flow is payment of liquidating dividends, the price at which stock can be sold is not applicable.