Tom's Health Clinic just paid a $4.40 annual dividend. The company has a policy of increasing the dividend by 4% annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another two years. If you require a 14% rate of return, how much will you be willing to pay for the 100 shares when you can afford to make this investment?

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The correct answer is B. $4,949. The dividend in two years will be $4.40 * (1.04)^2 = $4.624. The present value of the dividends for the next two years is $4.624 / (1.14)^2 = $3.76. The present value of the stock price in two years is $44 / (1.14)^2 = $35.68. The total present value of the investment is $3.76 + $35.68 = $39.44. The price you are willing to pay for the 100 shares is $39.44 * 100 = $3,944.

Tom's Health Clinic Just Paid a $4