A firm does not pay a dividend. It is expected to pay its first dividend of $1.00 per share in two years. This dividend will grow at 5 percent indefinitely. Using a 12 percent discount rate, compute the value of this stock.
A) $12.76
B) $12.19
C) $11.96
D) $11.39

Question

Quizplus · Accepted Answer

The correct answer is A because the value of the stock is $12.76. This is calculated using the formula for the present value of a growing perpetuity:PV = D / (r - g)where:PV is the present value of the stockD is the expected dividend in two yearsr is the discount rateg is the growth rate of the dividendIn this case, D = $1.00, r = 12%, and g = 5%. Plugging these values into the formula, we get:PV = $1.00 / (0.12 - 0.05) = $12.76

A Firm Does Not Pay a Dividend