Question

Use the followeng information to answer questions 13 and 14. Siesta Corp. will pay a dividend of $7 per year for the next 10 years, and then stop paying dividends forever. The required rate of the return from stocks in this nsk class is 14 percent. What is the present value of the dividend at the end of year T?

17.33
2.80
36.51
7.00
20.54
70.00
​

Answer 1

The present value of the dividend at the end of year T is $50. To calculate the present value of the dividend at the end of year T, we need to use the formula for the present value of a growing perpetuity.

In this case, the dividend is constant for the first 10 years and then stops forever.

The formula for the present value of a growing perpetuity is:

PV = D / (r - g)

Where:
PV = Present value of the dividend
D = Dividend amount
r = Required rate of return
g = Growth rate of the dividend

In this case, the dividend amount is $7 per year, the required rate of return is 14%, and the growth rate of the dividend is 0% (since it remains constant).

Plugging these values into the formula, we get:

PV = $7 / (0.14 - 0)

Simplifying the equation, we have:

PV = $7 / 0.14

Calculating the value, we find:

PV = $50

Therefore, the present value of the dividend at the end of year T is $50.

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