Question #21
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 8
Status: Correct
Correct Answer: A
Question
An investor projects that a firm will pay a dividend of $1.00 next year and $1.20 the following year. At the end of the second year, the expected price of the shares is $22.00. If the required return is 14%, what is the current value of the firm's shares?
Answer Choices:
A. $19.34
B. $18.73
C. $15.65
Explanation
The current value of the shares is $18.73:
V0 = $1.00 / 1.14 + $1.20 / (1.14) 2 + $22.00 / (1.14)2 = $18.73