Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in 2 years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.

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Quizplus · Accepted Answer

The correct answer is A because the value of the stock is $4.42. This is calculated using the formula:Stock Value = Present Value of Future Dividends / Discount RatePresent Value of Future Dividends = $0.10 / (1 + 0.13)^2 + $0.10 * (1 + 0.11) / (1 + 0.13)^3 + ...= $0.10 / 1.2769 + $0.11 / 1.4429 + ...= $0.0783 + $0.0763 + ...= $4.42Discount Rate = 13%

Dividend Initiation and Stock Value a Firm Does Not Pay