The Red Bud Co. pays a constant dividend of $1.60 a share. The company announced
ID: 2653070 • Letter: T
Question
The Red Bud Co. pays a constant dividend of $1.60 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 7.2 percent?
$1.72
$3.20
$1.78
$2.88
$4.48
The Red Bud Co. pays a constant dividend of $1.60 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 7.2 percent?
Explanation / Answer
The answer is as follows:
Current stock price = D1 / (1+7.2%) + D2 / (1+7.2%)^2 = 1.6 / (1+7.2%) + 1.6 / (1+7.2%)^2
= 1.6 *0.932836 + 1.6 *0.870183 = 1.492537 + 1.392292
= $2.88
Therefore, the stock worth today is $2.88.
THerefore, the correct answer is option D.
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