The following graph shows the value of a stock\'s dividends over time. The stock

Question

The following graph shows the value of a stock's dividends over time. The stock's current dividend is $1.00 per share, and dividends are expected to grow at a constant rate of 4.50% per year. The intrinsic value of a stock should equal the sum of the present value (PV) of all of the dividends that a stock is supposed to pay in the future, but many people find it difficult to imagine adding up an infinite number of dividends. Calculate the present value (PV) of the dividend paid today (Do) and the discounted value of the dividends expected to be paid 10 and 20 years from now (D10 and D20). Assume that the stock's required return (r) is 5.40%. Note: Carry and round the calculations to four decimal places Time Period Dividend's Expected Expected Dividend's Future Value Present Value Now End of Year 10 End of Year 20 End of Year 50

Explanation / Answer

Future value = 1*(1+1.045)^n

Present value = Future value/(1.054^n)

Time Period Future Value Present value Now 1 10.0000 1.55297 0.917818 20.0000 2.41171 0.842391 50.0000 9.03264 0.651304

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