Question

2. 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 per share, 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 present value (PV) of the dividend paid today (Do) and the discounted value of the dividends expected to be paid 10 and 20 years from now (D1o and D2o). Assume that the stock's required return (rs) is 10.40 %. Note: Carry and round the calculations to four decimal places. Dividend's Expected Expected Dividend's Time Period Future Value Present Value Now End of Year 10 End of Year 20 End of Year 50

Answer 1

Time period Dividend's expected future value Dividend's expected present value $1.00 $1.4106 $1.00 $0.5245 Now End of Year 10 [1.41/(1.104^10) 1 [1*(1.035A10) $1.9898 End of Year 20 $0.2751 [1.99/(1.104 20)1 [1*(1.035^20) $5.5849 [1*(1.035^50) End of Year 50 $0.0397 [5.58/(1.104A50)1