The Red Bud Co.just paid a dividend of €1.20 a share.The company announced today that it will continue to pay this constant dividend for the next 3 years after which time it will discontinue paying dividends permanently.What is one share of this equity worth today if the required rate of return is 7%?
A)€2.94
B)€3.15
C)€3.23
D)€3.44
E)€3.60

Question

Quizplus · Accepted Answer

The value of the stock is the present value of the dividends for the next 3 years. Using the formula for the present value of a perpetuity: PV = D / (1 + r)^t, where D is the dividend, r is the required rate of return, and t is the time period. Calculate for each year and sum them: €1.20/(1.07)^1 + €1.20/(1.07)^2 + €1.20/(1.07)^3 = €3.15.