Dividend Initiation and Stock Value A firm does not pay a dividend.It is expected to pay its first dividend of $0.10 per share in two years.This dividend will grow at 11 percent indefinitely.Using a 13 percent discount rate,compute the value of this stock.
A)$4.42
B)$4.59
C)$5.43
D)$7.21

Question

Quizplus · Accepted Answer

The correct answer is A. The value of the stock is $4.42. This is calculated using the dividend discount model, which takes into account the present value of all future dividends. The formula for the dividend discount model is:```V = D / (r - g)```where:* V is the value of the stock* D is the expected dividend in the next period* r is the discount rate* g is the growth rate of the dividendIn this case, the expected dividend in the next period is $0.10, the discount rate is 13%, and the growth rate of the dividend is 11%. Plugging these values into the formula, we get:```V = 0.10 / (0.13 - 0.11) = $4.42```

Dividend Initiation and Stock Value a Firm Does Not Pay