BC 'n D just paid its annual dividend of $.60 a share. The projected dividends for the next five years are $.30,$.50,$.75,$1.00,and $1.20,respectively. After that time,the dividends will be held constant at $1.40. What is this stock worth today at a 6% discount rate?
A) $20.48
B) $20.60
C) $21.02
D) $21.28
E) $21.43

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the dividends is $20.48. The present value of the dividends is calculated by dividing the dividend by the discount rate. The dividend for the first year is $.60, so the present value of the dividend for the first year is $.60 / 0.06 = $10.00. The present value of the dividends for the next five years is $.30 / 0.06 = $5.00, $.50 / 0.06 = $8.33, $.75 / 0.06 = $12.50, $1.00 / 0.06 = $16.67, and $1.20 / 0.06 = $20.00. The present value of the dividends after that time is $1.40 / 0.06 = $23.33. The total present value of the dividends is $10.00 + $5.00 + $8.33 + $12.50 + $16.67 + $20.00 + $23.33 = $95.83. The stock is worth $95.83 today at a 6% discount rate.

BC 'N D Just Paid Its Annual Dividend of