Knowee
Questions
Features
Study Tools

The company plans to dissolve in two years. At the present time, dividends at each date are set equal to the cash flow of $18,000. There are 100 shares outstanding, so the dividend per share is $180. Assume an 8% required rate of return. What is the present value of a share of stock?

Question

The company plans to dissolve in two years. At the present time, dividends at each date are set equal to the cash flow of 18,000.Thereare100sharesoutstanding,sothedividendpershareis18,000. There are 100 shares outstanding, so the dividend per share is 180. Assume an 8% required rate of return. What is the present value of a share of stock?

🧐 Not the exact question you are looking for?Go ask a question

Solution

To calculate the present value of a share of stock, we need to discount the dividends back to the present using the required rate of return.

Step 1: Identify the dividends per share, which is $180.

Step 2: Identify the required rate of return, which is 8% or 0.08.

Step 3: Since the company plans to dissolve in two years, we will receive dividends for two years.

Step 4: Calculate the present value of the dividends for each year and sum them up. The formula for the present value of a future cash flow is:

PV = CF / (1 + r)^n

where:

  • PV is the present value
  • CF is the cash flow (dividends per share in this case)
  • r is the required rate of return
  • n is the number of periods (years in this case)

For the first year: PV1 = 180/(1+0.08)1=180 / (1 + 0.08)^1 = 166.67

For the second year: PV2 = 180/(1+0.08)2=180 / (1 + 0.08)^2 = 154.32

Step 5: Sum up the present values of the dividends for each year to get the present value of the stock:

PV of stock = PV1 + PV2 = 166.67+166.67 + 154.32 = $320.99

So, the present value of a share of stock is approximately $320.99.

This problem has been solved

Similar Questions

paid cash dividend of $0.2 per share, investors require 16% return, the dividend expected to grow at a steady 8% per year, what is the current value of share, what will be the share worth in five years

The Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter. If the required rate of return on the stock is 18 percent, what is the current value of the stock?

The CFO of a publicly traded company is expecting to pay a dividend next year of $1.25 and projecting that the price of the company’s stock will be $45 in 1 year. The CFO has determined that the required rate of return for the company is 10%. Based on the data available, what is the value of one share of stock today?

A company has a constant growth of 4%, and a required rate of return of 18%. It has just paid a dividend of $2.50, what is the current share price valuatio

A company is currently running at a loss, but A expected to report EPS of 10 cents and payout 50% of earnings as a dividend in 2 years. Once profitable, earnings and dividend will grow at 15% for 5 years (year 3-7). From year 8, growth will slow to 4%. If A’s required return is 20%. What are A shares worth today?

1/3

Upgrade your grade with Knowee

Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.