Ancient Industries just paid a dividend of $1.03 a share.The company announced today that it expects to pay $.90 a share next year and a final liquidating dividend of $18.44 in two years.What is one share of this stock worth today if the required rate of return is 16 percent?
A)$14.94
B)$14.48
C)$13.23
D)$13.44
E)$13.60

Question

Quizplus · Accepted Answer

The value of the stock today can be calculated using the present value of the expected dividends. The dividends are $0.90 in one year and $18.44 (final liquidating dividend) in two years. Using the formula for present value, $PV = \frac{D1}{(1+r)^1} + \frac{D2}{(1+r)^2}$, where $D1$ and $D2$ are the dividends and $r$ is the required rate of return (16% or 0.16), we get:- $PV = \frac{0.90}{(1+0.16)^1} + \frac{18.44}{(1+0.16)^2}$- $PV = \frac{0.90}{1.16} + \frac{18.44}{1.3456}$- $PV = 0.77586 + 13.70463$- $PV ≈ 14.48$Therefore, the value of one share of this stock today is approximately $14.48.

Ancient Industries Just Paid a Dividend of $1