Ace Frisbee Corporation produces a good that is very mature in their product life cycles. Ace Frisbee Corporation is expected to pay a dividend in Year 1 of $3.00, a dividend in Year 2 of $2.00, and a dividend in Year 3 of $1.00. After Year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the shares is 8%. Using the multistage DDM, the shares should be worth ________ today.

Question

Quizplus · Accepted Answer

The multistage Dividend Discount Model (DDM) calculates the present value of expected dividends. The dividends for the first three years are discounted individually, and the declining perpetuity from Year 4 onwards is calculated using the formula for a perpetuity with growth. The sum of these present values gives the share price today, which is approximately $13.07.

Ace Frisbee Corporation Produces a Good That Is Very Mature