Question

The Red Bud Co. pays a constant dividend of $1.80 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7.4 percent?

Answer 1

Answer:

One share of this stock worth today if the required rate of return is 7.4 percent is $ 3.24

Explanation:

According to the details the dividend for the next 2 years = $1.80 a share and the required return is=7.40%.

Hence to calculate current price of stock we have to use the following formula:

current price= present value of future cash flows

current price=$1.80/1.074 + $1.80/1.074∧2

current price= $ 3.24

current price of stock is $ 3.24