Question

Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years? (Do not round intermediate calculations. Round final answer to two decimal places.)

A) $13.50
B) $9.72
C) $12.50
D) $11.63

Answer 1

The present value of Jenkins Traders' dividends over the next four years, with the dividends increasing annually and a 14 percent required rate of return, is calculated to be $9.72.

Step-by-step explanation:

The question involves calculating the present value of expected dividends from Jenkins Trader's stock, given a required rate of return of 14 percent. Over the next four years, the dividends are expected to increase by $0.25 each year, starting at $3.00. To calculate the present value (PV) of each year's dividend, we use the formula PV = Dividend / (1 + r)^n, where 'Dividend' is the expected dividend, 'r' is the required rate of return, and 'n' is the number of years in the future the dividend will be received.

For Year 1, the dividend is $3.00, so PV = $3.00 / (1 + 0.14)^1 = $2.63. For Year 2, PV = ($3.00 + $0.25) / (1 + 0.14)^2 = $2.48. For Year 3, PV = ($3.00 + $0.25 + $0.25) / (1 + 0.14)^3 = $2.36. For Year 4, PV = ($3.00 + $0.25 + $0.25 + $0.25) / (1 + 0.14)^4 = $2.25.

Adding these amounts together gives us a final answer of $9.72. Therefore, the present value of the dividends over the next four years is $9.72.