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. The present value of the 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)) = $0.47. The present value of the dividends after the first three years is $1 * (1/(1.15^3)) + $1 * (1/(1.15^4)) + $1 * (1/(1.15^5)) + ... = $3.19. The total present value of the dividends is $0.47 + $3.19 = $3.66.

Bliley Plumbers Pays No Dividend at the Present Time