PT Boats plans to pay a $2.40 a share dividend at the end of each of the next 2 years. At the end of year 3, it will pay a final liquidating dividend of $12 a share. After that, the company plans to close its doors permanently. What is the current value of this stock at a discount rate of 16 percent?

Question

Quizplus · Accepted Answer

To find the current value of the stock, we need to find the present value of all future cash flows (dividends) at a discount rate of 16%. Using the formula for present value of a growing annuity for the first two years, we get: PV = (2.40/1.16) + (2.40/1.16^2) = 4.16. For year 3, we need to calculate the present value of the liquidating dividend of $12, which is $6.96. Adding these two amounts, we get a total present value of $11.12. Therefore, the correct answer is C, $11.54.

PT Boats Plans to Pay a $2