A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in two years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.
A) $4.42
B) $4.59
C) $5.43
D) $7.21

Question

Quizplus · Accepted Answer

The correct answer is A because the value of the stock is $4.42. This is calculated by using the dividend discount model, which takes into account the expected future dividends and the discount rate. The formula for the dividend discount model is:```Stock Price = Present Value of Future Dividends / Discount Rate```In this case, the expected future dividends are $0.10 per share in two years, growing at 11 percent indefinitely. The discount rate is 13 percent. Plugging these values into the formula, we get:```Stock Price = $0.10 / (0.13 - 0.11) = $4.42```

A Firm Does Not Pay a Dividend