Yesteryear Productions pays no dividend at the present time.The company plans to start paying an annual dividend in the amount of $0.40 a share for two years commencing four years from today.After that time,the company plans on paying a constant $0.75 a share annual dividend indefinitely.How much are you willing to pay to buy a share of this stock today if your required return is 11.6 percent?

Question

Quizplus · Accepted Answer

First, we need to determine the present value of the expected future cash flows. Using the dividend discount model:
PV = (0 + 0 + 0 + 0 + 0.4/1.116^4 + 0.4/1.116^5 + 0.75/0.116) = $4.22

Therefore, if the required return is 11.6%, an investor would be willing to pay up to $4.22 to buy a share of this stock today. Choice B is the closest to this value, all other options are either above or below this value.

Yesteryear Productions Pays No Dividend at the Present Time