Wyatt Oil presently pays no dividend.You anticipate Wyatt Oil will pay an annual dividend of $0.56 per share two years from today and you expect dividends to grow by 4% per year thereafter.If Wyatt Oil's equity cost of capital is 12%,then the value of a share of Wyatt Oil today is:

Question

Quizplus · Accepted Answer

To calculate the present value of Wyatt Oil, we need to use the dividend discount model.

PV = D / (r-g)

PV = Present value of the stock 
D = Dividend expected in two years = $0.56 
r = Equity cost of capital = 12% or 0.12 
g = Expected growth rate of dividends = 4% or 0.04

PV = 0.56 / (0.12-0.04)^2 = $6.25

Therefore, the value of a share of Wyatt Oil today is $6.25. The correct answer is C.

Wyatt Oil Presently Pays No Dividend