The Red Bud Co. pays a constant dividend of $2.90 a share. The company announced

Question

The Red Bud Co. pays a constant dividend of $2.90 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 8.5 percent?

The Red Bud Co. pays a constant dividend of $2.90 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 8.5 percent?

Explanation / Answer

Value of Stock = PV of all future dividends

                      = 2.90/1.085 + 2.90/1.0852

                      = 2.6728 + 2.4634

                      = 5.1362

Hence, the value of stock today is $5.1362

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