Helluva stock currently pays a dividend of $1.20 per share.Dividends are expected to increase at the rate of $0.10 per share for the next eight years.Determine the current value of Helluva common stock to an investor who expects to be able to sell the stock for $28 after 5 years.Assume that the investor requires a 12 percent rate of return on the security.
A)$66
B)$28
C)$21.20
D)$15.88

Question

Quizplus · Accepted Answer

We can use the dividend discount model to find the current value of the stock:
PV = D1/(1+r) + D2/(1+r)^2 + ... + D8/(1+r)^8 + P/(1+r)^5
where:
PV = current stock price
D1 = dividend in year 1 = $1.20
r = required rate of return = 12%
P = expected stock price in year 5 = $28
Using the formula, we get:
PV = $1.20/(1+0.12) + ($1.20+$0.10)/(1+0.12)^2 + ... + ($1.20+$0.10*7)/(1+0.12)^8 + $28/(1+0.12)^5
PV = $21.20
Therefore, the current value of Helluva common stock is $21.20, so the best choice is C.

Helluva Stock Currently Pays a Dividend of $1