Question

The Red Bud Co. pays a constant dividend of $3.20 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.8 percent?

Answer 1

$5.64

Step-by-step explanation:

The computation of the one share of this stock today is shown below:

Year Amount Present value factor @8.8% Present value

1 $3.20 0.9191 $2.94

2 $3.20 0.8448 $2.70

Present value $5.64

The present value is

= 1 ÷ (1 + interest rate)^years