The Fish House is expected to pay annual dividends of $1.23 and $1.25 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.35 a share. What is the value of this stock at a required return of 16.4 percent?

Question

Quizplus · Accepted Answer

To find the current value of the stock, we need to calculate the present value of all future dividends.

Using the dividend discount model:

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

where PV is the present value of the stock, r is the required return, and D1, D2, D3, ... are the expected dividends in each year.

Plugging in the given values:

PV = 1.23/(1+0.164) + 1.25/(1+0.164)^2 + (1.35/(0.164-0.02))/(1+0.164)^2

PV = 1.066 + 1.019 + 8.967

PV = $8.05

Therefore, the value of the stock at a required return of 16.4 percent is $8.05. Choice C is the correct answer.

The Fish House Is Expected to Pay Annual Dividends of $1.23