Bliley Plumbers pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $0.20 a share for three years commencing three years from today. After that time, the company plans on paying a constant $1 a share dividend indefinitely. How much are you willing to pay to buy a share of this stock if your required return is 15%?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the future dividends is $3.66. The present value of the dividends for the first three years is $0.20 * (1/(1.15^3)) + $0.20 * (1/(1.15^4)) + $0.20 * (1/(1.15^5)) = $0.49. The present value of the constant dividend is $1 * (1/(0.15 * 1.15^3)) = $3.17. The total present value of the dividends is $0.49 + $3.17 = $3.66.

Bliley Plumbers Pays No Dividend at the Present Time