Question

gloria's boutique recently paid $1.65 as an annual dividend. future dividends are projected at $1.68, $1.72, $1.76, and $1.80 over the next four years, respectively. beginning five years from now, the dividend is expected to increase by 2.5 percent annually. what is one share of this stock worth to you if you require an 11 percent rate of return on similar investments? $15.78 $26.66 $19.68 $25.90 $21.33

Answer 1

The value of a stock is determined by calculating the present value of its expected future dividends using the discounted cash flow method, taking into account the required rate of return to assess the investment's risk and time value of money.

Step-by-step explanation:

The question pertains to the valuation of a stock based on its expected dividends and the required rate of return. To find the value of a share of Gloria's boutique, we need to calculate the present value of forecasted dividends for the first four years and, beginning from the fifth year, the present value of a perpetuity that grows at a constant rate. This process involves discounting future cash flows back to their present value using the required rate of return, which is a fundamental concept in finance known as the discounted cash flow (DCF) method.

To determine the value of one share of stock for Babble, Inc., an investor would sum the present value of the expected dividends, which are the future profits to be paid to shareholders. These present values would be calculated using the required rate of return that reflects the time value of money and the risk of the investment. This is essential when an investor considers the purchase of stock in a company expecting to receive dividends.