You own 900 shares of Dell Hardware. The company plans on issuing a dividend of $1.98 a share one year from now and then issuing a final liquidating dividend of $11.32 a share after one additional year. Your required rate of return on this security is 16.5 percent. Ignoring taxes, what is the value of one share of this stock to you today?

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of the future dividends using the required rate of return of 16.5%:

PV of first dividend = $1.98 / (1 + 0.165)^1 = $1.70
PV of second (liquidating) dividend = $11.32 / (1 + 0.165)^2 = $7.53

Next, we need to calculate the total present value of all future cash flows (dividends and the sale of the stock after two years). We can do this by multiplying the second dividend by the number of shares we own (900), and by calculating the present value of the sale price (which we assume is the same as the price of the stock after two years). The total present value is then:

Total PV = ($1.70 + $7.53*900) + ($10.04*900 / (1 + 0.165)^2) = $8,942.92

Finally, we divide the total present value by the number of shares we own (900) to get the value of one share today:

Value per share = $8,942.92 / 900 = $9.94

So the closest option is C) $10.04.

You Own 900 Shares of Dell Hardware