Question

You own 260 shares of Abco, Inc. stock. The company has stated that it plans on issuing a dividend of $.50 a share at the end of this year and then You own 260 shares of Abco, Inc. stock. The company has stated that it plans on issuing a dividend of $.50 a share at the end of this year and then issuing a final liquidating dividend of $2.10 a share at the end of next year. Your required rate of return on this security is 11 percent. Ignoring taxes, what is the value of one share of this stock today?issuing a final liquidating dividend of $2.10 a share at the end of next year. Your required rate of return on this security is 11 percent. Ignoring taxes, what is the value of one share of this stock today?

Answer 1

The answer is $2.15.

Step-by-step explanation:

The value of one share of this stock today is the sum of present value of future cash flows earned from holding the stock; discounting at required rate of return 11%.

By holding the stock, there are two cash flows earned by shareholders which are:

+ Dividend of $.50 a share at the end of this year whose present value is: 0.5/1.11 = $0.45;

+ Liquidating dividend of $2.10 a share at the end of next year whose present value is: 2.1/1.11^2 = $1.70

=> Value of the stock = 0.45 + 1.70 = $2.15.

So, the answer is $2.15.