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Coal Co. just announced that it will commence paying annual dividends. It plans to pay $1.75...

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Finance

Coal Co. just announced that it will commence paying annualdividends. It plans to pay $1.75 a year for four years, $1.25 ayear for the following three years, and then cease paying dividendsaltogether. How much is one share of this stock worth to you todayif you require an 8 percent rate of return?

a) $8.16

b) $6.32

c) $5.15

d) $7.79

Answer & Explanation Solved by verified expert
3.8 Ratings (528 Votes)

a) $8.16

Working:

As per dividend discount model, current value of stock is the present value of dividend.
Present value of dividends is calculated as follows:
Year Dividend Discount factor Present Value
a b c=1.08^-a d=b*c
1 $       1.75      0.9259 $       1.62
2 $       1.75      0.8573 $       1.50
3 $       1.75      0.7938 $       1.39
4 $       1.75      0.7350 $       1.29
5 $       1.25      0.6806 $       0.85
6 $       1.25      0.6302 $       0.79
7 $       1.25      0.5835 $       0.73
Total $       8.16
So, value of one share today is $       8.16

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Transcribed Image Text

Coal Co. just announced that it will commence paying annualdividends. It plans to pay $1.75 a year for four years, $1.25 ayear for the following three years, and then cease paying dividendsaltogether. How much is one share of this stock worth to you todayif you require an 8 percent rate of return?a) $8.16b) $6.32c) $5.15d) $7.79

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