WSU Inc. is a young company that does not yet pay a dividend. You believe that the company will begin to pay dividends 5 years from now, and that the company will then be worth $50 per share. If your required rate of return on this risky stock is 20%, what is the stock worth today?

Question

Quizplus · Accepted Answer

To calculate the present value of the stock, we need to discount the expected future value of $50 back to the present using the required rate of return of 20% and the number of years until the dividend starts being paid (5 years). 
PV = FV / (1 + r)^n 
PV = $50 / (1 + 0.20)^5 
PV = $20.09

WSU Inc Is a Young Company That Does Not Yet Pay