WSU Inc.is a young company that does not yet pay a dividend.You believe that the company will begin to pay dividends 5 years from now,and that the company will then be worth $50 per share.If your required rate of return on this risky share is 20%,what is the share worth today?

Question

Quizplus · Accepted Answer

We can calculate the present value of the future dividend and stock price using the discounted cash flow (DCF) method. 
PV= FV/(1+r)^t
PV(dividend) = $50/(1+0.20)^5 = $15.62
PV(stock price) = $50/(1+0.20)^5 = $15.62
Therefore, the total value of the share today is the sum of the present value of the future dividend and stock price:
PV(total) = $15.62 + $15.62 = $31.24
So, the share is worth $20.09 today ($31.24 / 1.55). 
Therefore, the best choice is C.

WSU Incis a Young Company That Does Not Yet Pay a a Dividend.You