Question #31
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 14
Status: Correct
Correct Answer: A
Question
An investor projects that a firm will pay a dividend of $1.25 next year, $1.35 the second year, and $1.45 the third year. At the end of the third year, she expects the asset to be priced at $36.50. If the required return is 12%, what is the current value of the shares?
Answer Choices:
A. $32.78
B. $29.21
C. $31.16
Explanation
The current value of the shares is $29.21: V0 = ($1.25 / 1.12) + ($1.35 / (1.12)2) + ($1.45 /
(1.12)3) + ($36.50 / (1 + 0.12)3) = $29.21