WSU is a young company that does not yet pay a dividend.You believe that the company will begin to pay dividends five years from now, and that the company will then be worth $50 per share.If your required rate of return on these risky shares is 20%, what are the shares worth today?

Question

Quizplus · Accepted Answer

To calculate the current share price, we need to find the present value of the future dividend payment and future share price discounted by the required rate of return. 
PV of future dividend payment = Dividend payment in Year 6 / (1+ Required rate of return)^5 = 0 (since there is no dividend payment till year 5)
PV of Future share price = Future share price / (1+ Required rate of return)^5 = $19.36
Therefore, the current share price is $20.09, which is the sum of the present value of the future dividend payment and future share price.

WSU Is a Young Company That Does Not Yet Pay