Millbury Gas and Oil's rate of return on equity is 12%. It can either pay a dividend of $5.00 today or reinvest the money and pay a dividend of $5.60 at the end of the year. From a shareholder's point of view, the value of the dividend paid now is ________ and the value of the dividend paid a year from now is ________.
A) $5.00, $4.46
B) $5.00, $5.00
C) $4.46, $5.00
D) $5.60, $5.00

Question

Quizplus · Accepted Answer

The value of the dividend paid now is $5.00 because it is the immediate cash that shareholders receive. The value of the dividend paid a year from now is also $5.00 when discounted back to the present at the rate of return on equity (12%), because the future dividend of $5.60 discounted at 12% equals approximately $5.00, indicating that from a shareholder's perspective, both options are equivalent when considering the time value of money.

Millbury Gas and Oil's Rate of Return on Equity Is