Question

Martin's Yachts is expected to pay annual dividends of $1.40, $1.75, and $2.00 a share over the next three years, respectively. After that, the dividend is expected to remain constant. What is the current value per share at a discount rate of 14 percent?

Answer 1

Answer:

Po = D1/1+ke + D2/(1+ke)2 + D3/(1+ke)3

Po = $1.40/1+0.14 + 1.75/(1+0.14)2+ $2(1+0.14)3

Po = $1.2281 + $1.3466 + $1.34998

Po = $3.92

Explanation:

The current value per share is equal to dividend paid in each year discounted at the appropriate cost of equity capital of the firm.

Po = Current value per share, D  represents dividend paid and ke = return on equity(discount rate)