Question

Jacob Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent? ( Do not round intermediate calculations. Round final answer to two decimal places.)

A) $4.85
B) $5.37
C) $5.50
D) $6.14

Answer 1

The present value of the dividends to be received over the next five years is $3.43.

Step-by-step explanation:

To calculate the present value of the dividends, we need to discount each dividend by the discount rate of 15%.

The dividends to be received in three years, two years from now, are $2.50 and $3.00 respectively. The present value of these dividends can be calculated using the formula:

Present Value = Future Value / (1 + Discount Rate)^Number of Periods

So, the present value of the first dividend is $2.50 / (1 + 0.15)^3 = $1.67, and the present value of the second dividend is $3.00 / (1 + 0.15)^4 = $1.76.

Adding up all the present values gives us a total of $1.67 + $1.76 = $3.43.

Therefore, the present value of the dividends to be received over the next five years is $3.43.