A corporation is scheduled to produce a line of products for the next ten years and then go out of business.The firm will pay an annual dividend of $1.75 for only those ten years.What is the present value of a share for this company if we want an 8% annual return on the stock?
A)$11.74
B)$12.97
C)$14.97
D)$15.97

Question

Quizplus · Accepted Answer

The present value of a share is the sum of the present values of all the dividends that will be paid over the next ten years. The present value of a dividend is the dividend divided by the discount rate. In this case, the discount rate is 8%, so the present value of a dividend of $1.75 is $1.75 / 0.08 = $21.88. The present value of a share is the sum of the present values of all the dividends that will be paid over the next ten years, so the present value of a share is $21.88 * 10 = $218.80.

A Corporation Is Scheduled to Produce a Line of Products