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Safari File Edit View History Bookmarks window Help ng.cengage.com Chegg.com Which Of The Following Forms Of Financing Does Not... Chegg.com MINDTAP fum Cengage Ch 07: Assignment- Common Stock: Characteristics, Valuation, and Issuance c Back to Assignment Attempts: 7 Average: 7/8 8. Dividend valuation model 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 3.50% per year. The intrinse 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 (Do and D20). Assume that the stock's required return (r) is 10.40%. Note: Carry and round the calculations to four decimal places. Time Period Dividend's Expected Expected Dividend's Future Value Present Value Now $1.0000 End of Year 10 End of Year 20 End of Year 50 Using the orange curve (square symbols), plot the present value of each of the expected future dividends for years 10, 20, and 50. The resulting curve will illustrate how the PV of a particular dividend payment will decrease depending on how far from today the dividend is expected to be received.

Explanation / Answer

Present value at the end of 10 days D10 - D0*((1+g)^10) 1*(1.035^10) 1.410599 Present Value of Dividend - 1.410599*(1/(1.1040^10) 0.52446 D20 - D0*((1+g)^20) 1*(1.035^20) 1.989789 Present Value of Dividend - 1.989789*(1/(1.1040^20) 0.275059 D50 - D0*((1+g)^50) 1*(1.035^50) 5.584927 Present Value of Dividend - 5.584927*(1/(1.1040^50) 0.039679 Time Period Dividend's expected future value Expected Dividend's present value Now $1 End of Year 10 1.4106 0.5245 End of Year 20 1.9898 0.2751 End of Year 50 5.5849 0.0397

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