Jack Hammer invests in a stock that will pay dividends of $3.05 at the end of th
ID: 2788004 • Letter: J
Question
Jack Hammer invests in a stock that will pay dividends of $3.05 at the end of the first year; $3.40 at the end of the second year; and $3.75 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for $55. What is the present value of all future benefits if a discount rate of 12 percent is applied?
Use Appendix B for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Dividend Present Value
$ 3.05
$ 3.40
3.75
55.00
Total $
Explanation / Answer
The present value of all future benefits if a discount rate of 12 percent is applied.
Future benefits of all the dividend at a discount rate of 12 percent
PV of dividends = 3.05/(1+.12) + 3.4/(1+.12)2 + 3.75/(1.12)3
= 2.7232 + 2.7105 + 2.6692 = $ 8.1028
PV of future share price = 55/(1.12)3 = $ 39.1479
Total PV of all the benefits = 8.1028 +391479 = $ 47.2507
Total present value of all future benefits = $ 47.25
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