J.C.Penney Company is expected to pay a dividend in year 1 of $1.65,a dividend in year 2 of $1.97,and a dividend in year 3 of $2.54.After year 3,dividends are expected to grow at the rate of 8% per year.An appropriate required return for the stock is 11%.The stock should be worth _______ today.
A)$33.00
B)$40.67
C)$71.80
D)$66.00
E)none of the above

Question

Quizplus · Accepted Answer

To find the present value of the stock, we need to calculate the present value of all future dividends and the present value of the expected stock price at the end of year 3 using the dividend discount model:

PV = D1/(1+r) + D2/(1+r)^2 + D3/(1+r)^3 + P3/(1+r)^3
PV = $1.65/(1+0.11) + $1.97/(1+0.11)^2 + $2.54/(1+0.11)^3 + $2.54*(1+0.08)/(0.11-0.08)/(1+0.11)^3
PV = $1.48 + $1.63 + $1.88 + $45.81
PV = $71.80

Therefore, the stock should be worth $71.80 today, option C is the correct choice.

JCPenney Company Is Expected to Pay a Dividend in Year