Question

The Red Bud Co. pays a constant dividend of $2.90 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.5 percent

Answer 1

The answer is $5.13

Step-by-step explanation:

This question will be solved using the Dividend Discount Model. It is one of the valuation methods used in valuing price of Equity/stock.

Po = D1 + (1 + r)^n + D2 + (1 + r)^n

Po is the current worth of stocks

r is the discount rate

n is the number of years

2.9/1.085^1 + 2.9/1.085^2

2.9/1.085 + 2.9/1.177225

$2.67 + 2.46

=$5.13