Question

Dixie Mart plans to pay dividends of $1.36, $1.15, $1.35, and $0.40 at the end of the next four years, respectively. After that, the company will be sold and shareholders are expected to receive $82.40 per share in Year 6 when the sale should be finalized. If the required return is 11.4 percent.What is the current value of one share of this stock?A. $47.71B. $51.87C. $46.50D. $51.08E. $47.29

Answer 1

Answer:

The correct answer is C. $46.50.

Explanation:

The current value of one share of stock is the present value of all expected future cash flows. The present value (PV) of cash flows in each year is calculated as follows.

PV = Future value / (1 + Rate of return)^Number of years

The future value is the dividend received on the share in a particular year while the rate of return is 11.4% (i.e. 0.114).

Applying the above formula,

$PV_{1} = 1.36 / (1 + 0.114)^{1} = 1.221$

$PV_{2} = 1.15 / (1 + 0.114)^{2} = 0.927$

$PV_{3} = 1.35 / (1 + 0.114)^{3} = 0.977$

$PV_{4} = 0.40 / (1 +0.114)^{4} = 0.260$

$PV_{6} = 82.40 / (1 + 0.114)^{6} = 43.114$

Current value of share = $1.221 + $0.927 + $0.977 + $0.260 + $43.114

                                      = $46.50

Hence, the correct option is C. $46.50.