Question

A stock has a share price of $54.00 and an expected annual return of 9.22 percent. The stock is expected to pay a constant dividend forever with the next annual dividend expected in 1 year. What is the present value of the annual dividend that is expected in 4 years from today?(Round the value to 100th decimal)

Answer 1

To calculate the present value of a dividend expected in 4 years from today, use the present value formula PDV = D / (1 + r)^t, where D is the dividend, r is the annual return, and t is the number of years until the dividend is received.

Step-by-step explanation:

To find the present value of the anticipated dividend a stock will pay in 4 years, given a constant expected annual return, we apply the formula for the present value of a perpetual dividend, which is Dividend / (Required Rate of Return). However, since the dividend is expected to be received in 4 years, we need to discount it back to its present value from 4 years in the future. The present value formula here is PDV = D / (1 + r)^t, where PDV is the present discounted value, D is the dividend, r is the rate of return, and t is the time in years. Using the given rate of return of 9.22 percent and considering the dividend to occur in 4 years, one would discount the future dividend back to its present value.