PT Boats plans to pay a $3.00 a share dividend at the end of each of the next 2 years. At the end...

Question:

PT Boats plans to pay a $3.00 a share dividend at the end of each of the next 2 years. At the end of year 3, it will pay a final liquidating dividend of $20 a share. After that, the company plans to close its doors permanently.

What is the current value of this stock at a discount rate of 13.5%?

Dividend Discount Model:

Dividend discount model is used to price a stock who pays dividends and is expected to pay dividends in the future. This model is generally not applicable to stocks who are perceived not to pay dividends in the future.

Answer and Explanation:

The current value of the stock is the discounted present value of the future dividends, i.e.,

  • {eq}\dfrac{3}{(1 + 13.5\%)} + \dfrac{3}{(1 + 13.5\%)^2} + \dfrac{20}{(1 + 13.5\%)^3} = 18.65 {/eq}

Tat is, the current value of the stock is $18.65.


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
10K

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