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The Red Bud Co. pays a constant dividend of $3.20 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.8 percent?

Respuesta :

Answer:

$5.64

Explanation:

The computation of the one share of this stock today is shown below:

Year    Amount       Present value factor @8.8%      Present value

1           $3.20           0.9191                                          $2.94

2          $3.20           0.8448                                         $2.70

Present value                                                               $5.64

The present value is

= 1 ÷ (1 + interest rate)^years

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