PV of dividends: Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years?
A) $13.50
B) $9.71
C) $12.50
D) $11.63

Question

Quizplus · Accepted Answer

The present value of the dividends can be calculated using the formula: 
PV = D1/(1+r) + D2/(1+r)^2 + D3/(1+r)^3 + D4/(1+r)^4
where, 
D1 = next year's dividend = $3.00 
D2 = next year's dividend + increase = $3.00 + $0.25 = $3.25 
D3 = next year's dividend + 2*increase = $3.00 + 2*$0.25 = $3.50 
D4 = next year's dividend + 3*increase = $3.00 + 3*$0.25 = $3.75 
r = required rate of return = 14% = 0.14

Substituting the values in the formula, we get: 
PV = $3.00/(1+0.14) + $3.25/(1+0.14)^2 + $3.50/(1+0.14)^3 + $3.75/(1+0.14)^4 
= $2.63 + $2.43 + $2.26 + $2.40 
= $9.71

Therefore, the present value of the dividends over the next four years is $9.71. The correct answer is B.

PV of Dividends: Next Year Jenkins Traders Will Pay a Dividend