You own 100 shares of MXR,Inc.stock.The company has stated that it plans on issuing a dividend of $.50 a share one year from today and then issuing a final liquidating dividend of $2.00 a share two years from today.Your required rate of return is 10%.Ignoring taxes,what is the value of one share of this stock today?

Question

Quizplus · Accepted Answer

The correct answer is A. The value of one share of this stock today is $2.11. This is calculated by discounting the future dividends back to the present at the required rate of return of 10%. The present value of the dividend to be received one year from today is $0.50 / (1 + 0.10) = $0.4545. The present value of the liquidating dividend to be received two years from today is $2.00 / (1 + 0.10)^2 = $1.6587. The total present value of the dividends is $0.4545 + $1.6587 = $2.1132, which is rounded to $2.11.

You Own 100 Shares of MXR,Inc