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, and dividends are expected to grow at a constant rate of 2.70% 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 PV of the dividend paid today (D_0) and the PV of the dividends expected to be paid 10 and 20 years from now (D_10 and D_20)- Assume that the stock's required return (r_s) is 8.40%.

Explanation / Answer

D0 = 1; g = 2.7%, k = 8.4%

Future Value D10 = 1*(1+2.7%)^10 =1.31

Present Value D10 = 1.31/(1.084)^10 =0.58

Future Value D20 = 1*(1.027)^20 =1.70

Present Value D20 = 1.70/(1.084)^20 = 0.34

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