You are evaluating the purchase of Cellars,Inc.common stock that just paid a dividend of $1.80.You expect the dividend to grow at a rate of 12% for the next three years.You plan to hold the stock for three years and then sell it.You estimate that a required rate of return of 17.5% will be adequate compensation for this investment.Calculate the present value of the expected dividends.Round to the nearest $0.10.
A)$4.90
B)$11.50
C)$9.80
D)$6.10

Question

Quizplus · Accepted Answer

The present value of the expected dividends is $4.90. This is calculated by using the formula:PV = D1 / (r - g) * (1 - (1 + g) ^ -n)where:PV is the present value of the expected dividendsD1 is the dividend just paidr is the required rate of returng is the expected growth rate of the dividendn is the number of yearsIn this case, D1 = $1.80, r = 17.5%, g = 12%, and n = 3. Plugging these values into the formula, we get:PV = $1.80 / (0.175 - 0.12) * (1 - (1 + 0.12) ^ -3)PV = $4.90

You Are Evaluating the Purchase of Cellars,Inc