Skylona Inc.'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 [blank] and the value of the dividend paid a year from now is [blank].
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 immediate cash that can be used or invested elsewhere. The value of the dividend paid a year from now is also $5.00 from a shareholder's perspective, assuming the rate of return on equity (12%) is equal to the shareholder's required rate of return. This means the future dividend of $5.60, when discounted back at the shareholder's required rate of return (12%), equals $5.00 today.