A firm plans to pay dividends of $12.50 at time 0 and $14 at time 1. Ignoring transaction costs and assuming that the investor can earn 8% on investments, which statement is true?

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Quizplus · Accepted Answer

The present value of the dividends is calculated as the sum of the present value of each dividend. The dividend at time 0 is already at present value, so it's $12.50. The dividend at time 1 is discounted back to present value: $14 / (1 + 0.08) = $12.96. The total present value is $12.50 + $12.96 = $25.46. Spending up to $25.46 from dividends at time 0 does not decrease the present value of all dividends received.

A Firm Plans to Pay Dividends of $12