Martin's Inc. is expected to pay annual dividends of $2.50 a share for the next three years. After that, dividends are expected to increase by 3% annually. What is the current value of this stock to you if you require a 9% rate of return on this investment?

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Quizplus · Accepted Answer

The correct answer is A.The current value of the stock is $39.47. This is calculated by using the dividend discount model, which takes into account the expected dividends and the required rate of return. The formula for the dividend discount model is:```Current Value = (D1 / (r - g)) + (D2 / (r - g)^2) + (D3 / (r - g)^3) + ... + (Dn / (r - g)^n)```where:* D1 is the expected dividend in year 1* r is the required rate of return* g is the expected growth rate of dividendsIn this case, the expected dividends are $2.50 per share for the next three years, and the expected growth rate of dividends is 3%. The required rate of return is 9%. Plugging these values into the formula, we get:```Current Value = (2.50 / (0.09 - 0.03)) + (2.50 / (0.09 - 0.03)^2) + (2.50 / (0.09 - 0.03)^3) = $39.47```