Rosebud Florists pays a constant dividend of $1.50 a share. The company announced today that it will continue to do this for another 2 years after which time it will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7.5%?

Question

Quizplus · Accepted Answer

The value of the stock today is the present value of the dividends for the next two years. The present value of the dividends is calculated as follows: PV = $1.50 / (1 + 0.075)^1 + $1.50 / (1 + 0.075)^2 = $1.3953 + $1.2977 = $2.693. Rounded to two decimal places, this is $2.69.

Rosebud Florists Pays a Constant Dividend of $1