Question

8. Expected dividends as a basis for stock values The following graph shows the value of a stock's dividends over time. The stock's current dividend is $1.00, and dividends are expected to grow at a constant rate of 3.50% per year. The intrinsic value of a stock should equal the sum of the present value (PV) of all of the dividends that a stock is supposed to pay in the future, but many people find it difficult to imagine adding up an infinite number of dividends. Calculate the PV of the dividend paid today (Do) and the PV of the dividends expected to be paid 10 and 20 years from now (D10 and D20 ). Assume that the stock's required return (rs) is 10.40%. (Note: Round the calculations to two decimal places.) Dividend's Expected Future Value Expected Dividend's Present Value Time Period Now End of Year 10 End of Year 20 End of Year 50

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

% Cut 11 A = A A = E Wrap Text Merge & Center General $ % 48, Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear" Filter Editing Find & Select Alignment E Number Cells Calibri Ea Copy Paste Format Painter BI U Clipboard BB1 - AV 1 Font fo AW AX AY AZ BA BB BC BD BE BE BG BH BI 2 3 3.50% 10.40% DISCOUNT RATE = expected dividend's present value 4 current dividend 5 6 GROWTH RATE 7 Time period Dividend's expected 8 Future value 9 now 10 End of year 10 1*(1 +0.035)^10 = 11 End of year 20 1*(1 +0.035)^20 = 12 End of year 50 1*(1 + 0.035)^50 = 13 14 15 16 17 18 1.4106 1.9898 5.5849 1.4106/(1+0.104)^10 = 1.9898/(1+0.104)^20 5.5849/(1+0.104)^50 = 0.5245 0.2751 0.0397 19 6.0000 TII L I

| || TTVIII | TITLE THIS LỊCH THI IIIIIII Calibri = = = Dr E Autosum General 11 - A A A Wrap Text E Merge & Center - H Fill - B I U E $ % 48.08 Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Sort & Find & Filter - Select Editing Alignment Number Cells % Cut En Copy Paste Format Painter Clipboard BB36 AV 18 19 20 D Font fax AW AX AY AZ BA BB BC BD BE BE BG BH BL 6.0000 5.5849 21 5.0000 22 23 year 24 25 4.0000 future dividend present value of dividend 1.4106 0.5245 1.9898 0.2751 5.5849 0.0397 future dividend 26 50 DIVIDEND 3.0000 27 28 2.0000 1.9898 -present value of dividend 1.4106 1.0000 29 30 31 32 33 0.5245 0.0000 H 0 10 20 0.2751 30 YEARS 40 50 0.0397 60 34 35 36.