Question

You are evaluating the purchase of Cellars, Inc. common stock 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 stock 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.
A) $4.91
B) $5.40
C) $9.80
D) $6.80

Answer 1

Answer:

A) $4.91

Explanation:

The computation of the present value of the expected dividends is shown below:

Particulars                     Dividend   Discount factor   Present value

Dividend in year 1          $2.02        0.851                    $1.72

Dividend in year 2         $2.26        0.724                   $1.64

Dividend in year 3         $2.53         0.616                   $1.56

Present value                                                                $4.91

The value of the dividend is come after considering the growth rate of 12%