PV of dividends: 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 rat of return is 15 percent?

Question

Quizplus · Accepted Answer

To calculate the present value of the dividends, we need to find the present value of each individual dividend and then add them up.

Year 1: No dividend
Year 2: No dividend
Year 3: No dividend
Year 4: Dividend of $4.00
PV of Year 4 dividend = $4.00 / (1+0.15)^4 = $2.14

Year 5: Dividend of $4.40 (10% increase from Year 4)
PV of Year 5 dividend = $4.40 / (1+0.15)^5 = $1.89

Year 6: Dividend of $4.84 (10% increase from Year 5)
PV of Year 6 dividend = $4.84 / (1+0.15)^6 = $2.54

Summing up all the present values of the dividends, we get:

PV of dividends = $2.14 + $1.89 + $2.54 = $6.57

Therefore, the correct answer is (C) $6.57.

PV of Dividends: Kleine Toymakers Is Introducing a New Line