Alpha Wood Interiors announced that it is going out of business. As of today, no more regular dividends will be paid. The firm will, however, pay two liquidating dividends. The first will be paid one year from now in the amount of $17 a share. The second and final payment will be paid two years from now at an estimated $32 a share. What is the value of this stock today at a discount rate of 6 percent?

Question

Quizplus · Accepted Answer

To find the value of the stock today, we discount the future liquidating dividends back to the present value using the given discount rate of 6 percent. The formula for the present value (PV) of a future cash flow (CF) is PV = CF / (1 + r)^n, where r is the discount rate and n is the number of periods.First payment: PV = $17 / (1 + 0.06)^1 = $17 / 1.06 = $16.04Second payment: PV = $32 / (1 + 0.06)^2 = $32 / 1.1236 = $28.48Adding these two present values together gives the total value of the stock today: $16.04 + $28.48 = $44.52.

Alpha Wood Interiors Announced That It Is Going Out of Business