Mature Products Corporation produces goods that are very mature in their product life cycles.Mature Products Corporation is expected to pay a dividend in year 1 of $2.00,a dividend of $1.50 in year 2,and a dividend of $1.00 in year 3.After year 3,dividends are expected to decline at a rate of 1% per year.An appropriate required rate of return for the stock is 10%.The stock should be worth ______.

Question

Quizplus · Accepted Answer

To calculate the present value of the expected dividends, we can use the dividend discount model:

PV = D1 / (1+r) + D2 / (1+r)^2 + D3 / (1+r)^3 + ... + Dn / (1+r)^n

Where:
PV = present value of the stock
D1, D2, D3, ... Dn = expected dividends for years 1 to n
r = required rate of return

Plugging in the values from the problem, we get:

PV = $2 / (1+0.1) + $1.5 / (1+0.1)^2 + $1 / (1+0.1)^3 + ($1 * 0.99) / (0.1 - 0.01)

PV = $1.818 + $1.239 + $0.826 + $10.693

PV = $14.576

Therefore, the stock should be worth $14.576, which is closest to option B) $10.57.

Mature Products Corporation Produces Goods That Are Very Mature in Their