You are evaluating the purchase of Cellars,Inc.ordinary shares that just paid a dividend of $1.80.You expect the dividend to grow at a rate of 12% for the next three years.You plan to hold the shares for three years and then sell it.You estimate that a required rate of return of 17.5% will be adequate compensation for this investment.Calculate the present value of the expected dividends.

Question

Quizplus · Accepted Answer

The present value of the expected dividends is calculated by discounting each expected dividend back to the present value using the required rate of return. The dividends for the next three years are $2.016, $2.25792, and $2.529, respectively. Discounting these at 17.5% gives a present value of approximately $4.91.

You Are Evaluating the Purchase of Cellars,Inc