Beaksley SA is a very cyclical type of business which is reflected in its dividend policy.The firm pays a €2.00 a share dividend every other year.The last dividend was paid last year.Five years from now,the company is repurchasing all of the outstanding shares at a price of €50 a share.At an 8% rate of return,what is this equity worth today?
A)€34.03
B)€37.21
C)€43.78
D)€48.09
E)€53.18

Question

Quizplus · Accepted Answer

To calculate the present value of the equity, we need to discount the expected cash flows at the given rate of return. 
First, we need to calculate the present value of the dividends paid over the next four years. We know that the company pays a dividend of €2 per share every other year, so we need to discount that back to present value. Using the formula for present value of an annuity, we get:

PV of dividends = €2/(1+0.08)^2 + €2/(1+0.08)^4 + €2/(1+0.08)^6 + €2/(1+0.08)^8
PV of dividends = €2.56

Next, we need to calculate the present value of the share repurchase. The company is buying back all outstanding shares at €50 per share five years from now, which means the present value of the repurchase is:

PV of repurchase = €50/(1+0.08)^5
PV of repurchase = €30.53

Now we can calculate the present value of the equity by adding the PV of dividends and the PV of repurchase:

PV of equity = PV of dividends + PV of repurchase
PV of equity = €2.56 + €30.53
PV of equity = €33.09

Therefore, the equity is worth €33.09 today. The closest option is B) €37.21, which is the correct answer.

Beaksley SA Is a Very Cyclical Type of Business Which