Comfort Ice Cream has plans to pay decreasing annual dividends of $1.75, $1.60, and $1.45 over the next three years, respectively. After that, the firm will increase the dividend by 4 percent each year. What is the value of this stock today at a discount rate of 12 percent?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the dividends is $17.29. The present value of the dividends is calculated as follows:PV = $1.75 / (1 + 0.12)^1 + $1.60 / (1 + 0.12)^2 + $1.45 / (1 + 0.12)^3 + $1.45 * (1 + 0.04) / (0.12 - 0.04) * (1 / (1 + 0.12)^3)= $1.75 / 1.12 + $1.60 / 1.2544 + $1.45 / 1.4049 + $1.45 * 1.04 / 0.08 * 1 / 1.4049= $1.5625 + $1.276 + $1.032 + $1.344= $17.29

Comfort Ice Cream Has Plans to Pay Decreasing Annual Dividends