Beaksley,Inc. is a very cyclical type of business which is reflected in its dividend policy. The firm pays a $2.00 a share dividend every other year. The last dividend was paid last year. Five years from now,the company is repurchasing all of the outstanding shares at a price of $50 a share. At an 8% rate of return,what is this stock worth today?
A) $34.03
B) $37.21
C) $43.78
D) $48.09
E) $53.18

Question

Quizplus · Accepted Answer

The stock's worth today is the present value of the expected dividends and the repurchase price. The dividends are $2 in years 2 and 4, and the repurchase price is $50 in year 5. Discount these cash flows at 8% to find the present value: PV = $2/(1.08)^2 + $2/(1.08)^4 + $50/(1.08)^5 = $37.21.