Final answer:
The present value of the two dividend payments, when discounted at a 7 percent annual rate, totals $1.5904 per share. After two years, at a 7 percent growth rate, this would become $1.8152 per share, which reflects the total investment income from these dividends if no funds are received until the end of the two years.
Step-by-step explanation:
To calculate the value of the total investment income after two years without receiving any funds until then, we need to discount the future dividend payments to their present value. The first dividend is $0.20 a share, which will be paid in one year, and the final liquidating dividend is $1.60 a share, to be paid in two years. We use the formula for the present value of future cash flows, which takes into account the 7 percent annual discount rate.
The present value (PV) of the first dividend is calculated as follows:
PV = D / (1 + r)^n
PV = $0.20 / (1 + 0.07)^1 = $0.1869 per share
Similarly, the present value of the liquidating dividend is:
PV = $1.60 / (1 + 0.07)^2 = $1.4035 per share
The total present value of both dividends is therefore:
Total PV = $0.1869 + $1.4035 = $1.5904 per share.
Final dividend will grow at the 7 percent rate for two years, which means it will be:
Future Value (FV) = PV * (1 + r)^n = $1.5904 * (1 + 0.07)^2 = $1.8152 per share.