The Cart Wheel plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 17 percent rate of return?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the dividends is $2.38. The present value of the dividend for next year is $1.20 / (1 + 0.17) = $1.0256. The present value of the dividend for the following two years is $1.00 / (1 + 0.17)^2 = $0.7082. The present value of the dividend for the following three years is $0.00 / (1 + 0.17)^3 = $0.0000. The total present value of the dividends is $1.0256 + $0.7082 + $0.0000 = $2.38.

The Cart Wheel Plans to Pay an Annual Dividend of $1.20