Whistle Stop Trains pays a constant $16 dividend on its stock.The company will maintain this dividend for the next 14 years and will then cease paying dividends forever.What is the current price per share if the required return on this stock is 15 percent?
A)$77.78
B)$82.48
C)$91.59
D)$106.67
E)$112.00

Question

Quizplus · Accepted Answer

We can use the formula for the present value of a perpetuity to calculate the current price per share:

PV = Dividend / Required Return

For this problem, the dividend is $16 and the required return is 15%, so:

PV = $16 / 0.15
PV = $106.67

However, we only want to know the price for the first 14 years, so we need to discount this to the present value using the formula:

PV = FV / (1 + r)^n

where FV is the future value ($106.67), r is the required return (0.15), and n is the number of years (14).

PV = $106.67 / (1 + 0.15)^14
PV = $91.59

Therefore, the current price per share is $91.59, and the best choice is C).

Whistle Stop Trains Pays a Constant $16 Dividend on Its