Beaksley,Inc.is a very cyclical type of business that 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 $55 a share.At an 9% rate of return,what is this stock worth today?

Question

Quizplus · Accepted Answer

To calculate the present value of the stock, we need to discount the future cash flows back to their present value. Since the company pays $2.00 dividend every other year, we need to calculate the present value of an annuity due. Using a financial calculator, we get:

PV = $2.00 [(1 - (1 / (1 + 0.09)^10)) / 0.09] + $55 / (1 + 0.09)^5
PV = $2.00 [7.5403] + $29.35
PV = $38.85

Therefore, the stock is worth $38.85 today. The correct answer is C.