BC 'n D just paid its annual dividend of $.60 a share.The projected dividends for the next five years are $.30,$.50,$.75,$1.00,and $1.20,respectively.After that time,the dividends will be held constant at $1.40 per share.What is this stock worth today at a discount rate of 14 percent?
A)$7.56
B)$10.60
C)$8.02
D)$9.28
E)$9.43

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the dividends is $7.56. The present value of the dividends is calculated by dividing the dividend by the discount rate. The dividend for the first year is $.30, so the present value of the dividend for the first year is $.30 / 0.14 = $2.14. The present value of the dividend for the second year is $.50 / 0.14 = $3.57. The present value of the dividend for the third year is $.75 / 0.14 = $5.36. The present value of the dividend for the fourth year is $1.00 / 0.14 = $7.14. The present value of the dividend for the fifth year is $1.20 / 0.14 = $8.57. The present value of the dividends for the sixth year and beyond is $1.40 / 0.14 = $10.00. The total present value of the dividends is $2.14 + $3.57 + $5.36 + $7.14 + $8.57 + $10.00 = $36.78. The present value of the stock is $36.78 / 1.14 = $32.26.

BC 'N D Just Paid Its Annual Dividend of