DC Motors recently paid $1.10 as its annual dividend.Future dividends are projected at $1.06,$1.02,and $1.00 over the next three years,respectively.After that,the dividend is expected to decrease by 2 percent annually.What is one share of this stock worth at a rate of return of 17 percent?

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can calculate the present value of all future dividends and the terminal value of the stock.

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

PV = $1.06 / (1 + 0.17) + $1.02 / (1 + 0.17)^2 + $1.00 / (1 + 0.17)^3 + $1.00 * (1 - 0.02) / (0.17 - 0.02) / (1 + 0.17)^3

PV = $0.9103 + $0.7711 + $0.6505 + $13.9512

PV = $16.2831

Therefore, the value per share is $16.2831.

Answer B is the closest to $16.2831, and it is $5.50.

DC Motors Recently Paid $1