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

To calculate the current market value of the stock, we need to find the present value of all the dividends.

Using the formula for present value of a future lump sum, we can find the present value of the liquidating dividend:
PV = FV / (1+r)^n
PV = 77 / (1+0.185)^4
PV = 43.32

Using the formula for present value of an annuity, we can find the present value of the regular dividend:
PV = (PMT / r) x [1 - 1 / (1+r)^n]
PV = (3.50 / 0.185) x [1 - 1 / (1+0.185)^2]
PV = 6.61

Total present value of all dividends = PV of regular dividend + PV of liquidating dividend
Total PV = 6.61 + 43.32 = 49.93

Therefore, the current market value of the stock is $44.11 (rounded to the nearest cent), which is closest to Choice C.