Jack Hammer invests in a stock that will pay dividends of $3.18 at the end of th
ID: 2469526 • Letter: J
Question
Jack Hammer invests in a stock that will pay dividends of $3.18 at the end of the first year; $3.66 at the end of the second year; and $4.14 at the end of the third year. Also at the end of the third year he believes he will be able to sell the stock for $68.
What is the present value of these future benefits if a discount rate of 11 percent is applied? (Use a Financial calculator to arrive at the answers. Round the final answers to 2 decimal places.)
Jack Hammer invests in a stock that will pay dividends of $3.18 at the end of the first year; $3.66 at the end of the second year; and $4.14 at the end of the third year. Also at the end of the third year he believes he will be able to sell the stock for $68.
Explanation / Answer
Present value factor = 1 / (1+ Discount rate)Discounting period
Present value for 1 year = 1/1.11 = 0.9009
Present value for 2 years = 1/1.112 = 0.8116
Present value factor for 3 years = 1/1.113 = 0.7312
Year
Cash flow
Present value factor
Present value
1
$3.18
0.9009
$2.86
2
$3.66
0.8116
$2.97
3
$4.14
0.7312
$3.03
3
$68.00
0.7312
$49.72
Total
$58.58
Year
Cash flow
Present value factor
Present value
1
$3.18
0.9009
$2.86
2
$3.66
0.8116
$2.97
3
$4.14
0.7312
$3.03
3
$68.00
0.7312
$49.72
Total
$58.58
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