Question

Best Value Outlet recently announced that it intends to pay dividends of $0.40, $0.60, $0.75, and $1.00 per share over the next four years, respectively. After that, the plan is to increase the dividend by 3.5 percent annually. What is the current value of this stock if the applicable discount rate is 13.5 percent?
A. $6.44
B. $7.83
C. $8.17
D. $9.55
E. $13.10

Answer 1

Answer:

correct option C

Explanation:

Give data:

next four year dividend - $0.40,$0.60, $0.75 and $1.00

interest rate - 3.5%

Year    Particulars  Amount  [email protected]%       PV

 1        Dividend      0.4            0.881             = 0.4 *0.881 = $0.3524

 2      Dividend      0.60          0.7763            = 0.60 *0.7763 = $ 0.4658

 3      Dividend      0.75           0.6839           = 0.5129

 

 4      Dividend      1.00          0.6029             = 0.6026

 4      Price            $10.350       0.6026          = 6.2367

current value  = (0.3524 + 0.4658+0.5129+0.6026+6.2367) = $8.17

[email protected]% for dividend 0.40

= $\frac{1}{(1+13.5\%)^{year\ 1}}$

                                                    = $\frac{1}{(1+13.5\%)^{1}} = 0.881$

 

[email protected]% for dividend 0.60

= $\frac{1}{(1+13.5\%)^{year\ 2}}$

                                                  = $\frac{1}{(1+13.5\%)^{2}} = 0.0.7763$

Price is calcualted as

= \frac{year\ 4*1.035}{13.5\% - 3.5\%}

=\frac{4*1.035}{13.5\% -3.5\%}