ABC Inc. has announced today that they are going out of business. As of today, no more regular dividends will be paid. The intention of the firm is to pay two liquidating dividends. The first dividend will be paid one year from now in the amount of $20 a share. The second and final dividend will be paid two years from now at an estimated $13 a share. What is the value of this stock to you today if you feel the appropriate discount rate is 16%?

Question

Quizplus · Accepted Answer

To calculate the present value of the two liquidating dividends, we need to discount them back to their present value using the appropriate discount rate, i.e., 16%.

PV of first dividend = $20 / (1 + 0.16) ^ 1 = $17.24 
PV of second dividend = $13 / (1 + 0.16) ^ 2 = $9.66

So, the total present value of the two liquidating dividends is:

PV(total) = $17.24 + $9.66 = $26.90

Therefore, the value of the stock to you today is $26.90.

ABC Inc Has Announced Today That They Are Going Out of of Business