You own 200 shares of Loner,Inc. stock. The company has stated that it plans on issuing a dividend of $.20 a share one year from today and then issuing a final liquidating dividend of $1.60 a share two years from today. Your required rate of return is 11%. Ignoring taxes,what is the value of one share of this stock today?

Question

Quizplus · Accepted Answer

The correct answer is A because the value of one share of this stock today is $1.48. This is calculated by using the formula for the present value of a dividend-paying stock:PV = D1 / (r - g) + D2 / (r - g)^2 + ... + Dn / (r - g)^nwhere:PV is the present value of the stockD1 is the dividend paid in one yearD2 is the dividend paid in two yearsr is the required rate of returng is the growth rate of the dividendsIn this case, D1 = $0.20, D2 = $1.60, r = 11%, and g = 0%. Plugging these values into the formula, we get:PV = $0.20 / (0.11 - 0%) + $1.60 / (0.11 - 0%)^2PV = $1.48

You Own 200 Shares of Loner,Inc