You own 200 shares of Loner stock.The firm announced that it will be issuing a dividend of $.20 a share one year from today followed by a final liquidating dividend of $1.60 a share two years from today.If you can earn 7 percent on your funds,what will be the value of your total investment income in two years if you do not want to receive any funds until then?

Question

Quizplus · Accepted Answer

The value of the total investment income in two years can be calculated by discounting the dividends back to their present value and then summing them up. The dividends are $.20 a share one year from today and $1.60 a share two years from today. With 200 shares, the total dividends are $40 (200 * $.20) in one year and $320 (200 * $1.60) in two years. Discounting these back at 7%:- The present value of the first dividend ($40) in one year: $40 / (1 + 0.07) = $37.38- The present value of the second dividend ($320) in two years: $320 / (1 + 0.07)^2 = $280.37Adding these together gives the total present value of the dividends: $37.38 + $280.37 = $317.75. However, the question asks for the value in two years, not the present value. To find the future value of the total investment income in two years, we need to compound the present value of the dividends for two years at 7%:- Future value = $317.75 * (1 + 0.07)^2 = $362.80Therefore, the value of the total investment income in two years is $362.80.

You Own 200 Shares of Loner Stock