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Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years

Respuesta :

Shahzaibfaraz

Answer:

Present value = $9.7150 rounded off to $9.72

Explanation:

Using the dividend discount model, we calculate the price of the stock today. It values the stock based on the present value of the expected future dividends from the stock. To calculate the present value of the next four dividends, we will use the following formula,

Present value = D1 / (1+r)  +  D2 / (1+r)^2  +  D3 / (1+r)^3  +  D4 / (1+r)^4

Where,

  • r is the required rate of return

Present value = 3 / (1+0.14)  +  (3+0.25) / (1+0.14)^2  +  

(3+0.25+0.25) / (1+0.14)^3  +  (3+0.25+0.25+0.25) / (1+0.14)^4

Present value = $9.7150 rounded off to $9.72

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