Question

JJ Industries will pay a regular dividend of $2.50 per share for each of the next four years. At the end of the four years, the company will also pay out a liquidating dividend of $61 per share, and the company will cease operations. If the discount rate is 8 percent, what is the current value of the company’s stock

Answer 1

$53.11

Step-by-step explanation:

The computation of the current value of the common stock is shown below

Year Cash flow Discount rate at 8% Present Value

1 $2.5 0.92593 $2.31

2 $2.5 0.85734 $2.14

3 $2.5 0.79383 $1.98

4 $2.5 0.73503 $1.84

4 $61 0.73503 $44.84

Total $53.11

The discount is come from

= 1 ÷ 1 + 0.08^1

The same is applied for other years

We simply multiplies the dividend with its discount rate so that the present value or the current value could arrive