PV of dividends: Harvey's Toymakers is introducing a new line of digital toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Harvey's plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of rate of return is 15 percent?
A) $13.24
B) $12.00
C) $6.57
D) $10.24

Question

Quizplus · Accepted Answer

To calculate the present value of the dividends, we need to use the formula:

PV = D1/(1+r)^1 + D2/(1+r)^2 + ... + Dn/(1+r)^n

Where: 
D1 = dividend in year 1 = $0.00 
D2 = dividend in year 2 = $0.00 
D3 = dividend in year 3 = $0.00 
D4 = dividend in year 4 = $4.00 
D5 = dividend in year 5 = $4.40 ($4.00 x 1.10) 
D6 = dividend in year 6 = $4.84 ($4.40 x 1.10) 
r = required rate of return = 15%

Substituting the values:

PV = 0/1.15^1 + 0/1.15^2 + 0/1.15^3 + 4/1.15^4 + 4.40/1.15^5 + 4.84/1.15^6

PV = $6.57

Therefore, the present value of the dividends to be paid out over the next six years is $6.57. Option C is the correct answer.

PV of Dividends: Harvey's Toymakers Is Introducing a New Line