Home Builders, Inc. is a very cyclical type of business which is reflected in their dividend policy. The firm pays a $3.50 per share dividend every other year. The last dividend was paid last year. Four years from now, the company plans to pay a $77 liquidating dividend per share. What is the current market value of this stock if the market rate of return is 18.5%?

Question

Quizplus · Accepted Answer

The current market value of the stock is the present value of all future dividends. The dividends are $3.50 in 2 years and $77 in 4 years. Using the market rate of return of 18.5%, the present value is calculated as: PV = $3.50 / (1 + 0.185)^2 + $77 / (1 + 0.185)^4 = $44.11.