Question

Darden Restaurants is expected to pay annual dividends of $1.90 and $2.10 over the next two years,respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is thevalue of this stock at a required return of 16 percent?0 Hint: You will need to use general dividend discount model and the dividend discount model withno dividend growth to answer this question.‘ L ‘ $12.44. : . $14.60‘ L ‘ $13.89‘ L ‘ $13.30

Answer 1

Answer:

$13.89

Explanation:

The computation of the value of stock is shown below:

Year Dividend Present value factor at 16% Present value  

1         $1.90                0.862                               $1.64

2        $2.10                 0.743                               $1.56

3        $2.30

Price $14.375             0.743                               $10.68

The price is computed below:

= $2.30 ÷ 16% = $14.375

Total present value $13.89

The present value factor is computed below:

= 1 ÷ (1 + rate) ^ years

For Year 1 = 1 ÷ 1.16^1 = 0.862

For Year 2 = 1 ÷ 1.16^2 = 0.743