Beaksley, Inc. is a very cyclical type of business which is reﬂected in its dividend policy. The ﬁrm pays a $2.00 a share dividend every other year. The last dividend was paid last year. Five years
From now, the company is repurchasing all of the outstanding shares at a price of $50 a share. At an
8% rate of return, what is this stock worth today?

Question

Quizplus · Accepted Answer

To find the present value of the stock, calculate the present value of the dividends and the repurchase price. The dividends are $2 in year 1 and year 3. The repurchase price is $50 in year 5. Discount these cash flows at 8% to find the present value today. The calculation is: PV = $2/(1.08)^1 + $2/(1.08)^3 + $50/(1.08)^5 = $1.85 + $1.59 + $34.77 = $38.21.