Kleine Toymakers is introducing a new line of robotic 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 Kleine 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 return is 15 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)
A) $13.24
B) $12.00
C) $6.57
D) $10.24

Question

Quizplus · Accepted Answer

To find the present value of the dividends, we need to calculate the present value of each individual dividend payment, using the formula:

PV = FV / (1 + r)^n

Where PV is the present value, FV is the future value, r is the required rate of return, and n is the number of years.

Year 1: No dividend
Year 2: No dividend
Year 3: No dividend
Year 4: PV = 4 / (1 + 0.15)^4 = 2.48
Year 5: PV = 4.4 / (1 + 0.15)^5 = 2.18
Year 6: PV = 4.84 / (1 + 0.15)^6 = 2.16

The present value of all dividend payments is the sum of the present value of each individual payment:

PV of dividends = 2.48 + 2.18 + 2.16 = 6.57

Therefore, the present value of the dividends to be paid out over the next six years is $6.57. The best choice is C.

Kleine Toymakers Is Introducing a New Line of Robotic Toys