BC 'n D just paid its annual dividend of €.60 a share.The projected dividends for the next five years are €.30,€.50,€.75,€1.00,and €1.20,respectively.After that time,the dividends will be held constant at €1.40.What is this equity worth today at a 6% discount rate?
A)€20.48
B)€20.60
C)€21.02
D)€21.28
E)€21.43

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the dividends is €20.48. This is calculated by taking the sum of the present values of each dividend, which are:PV of €.30 = €.30 / (1 + 0.06)^1 = €.2830PV of €.50 = €.50 / (1 + 0.06)^2 = €.4535PV of €.75 = €.75 / (1 + 0.06)^3 = €.6528PV of €1.00 = €1.00 / (1 + 0.06)^4 = €.8494PV of €1.20 = €1.20 / (1 + 0.06)^5 = €.9986PV of €1.40 = €1.40 / (0.06) = €23.3333The sum of these present values is €20.48.

BC 'N D Just Paid Its Annual Dividend of €