Question

Grandiose Growth has a dividend growth rate of 10%. The discount rate is 8%. The end-of-year dividend will be $5 per share.

What is the present value of the dividend to be paid in year 1? Year 2? Year 3?

Answer 1

Year 1 2 3

Present value 5.09 5.19 5.28

Step-by-step explanation:

The Present Value of a future sum is the worth today where the sum is discounted at a particular rate of return.

The formula below would be of help to work out the Present Value

Present Value = FV× (1+r)^(-n)

FV - Future Value, r- rate of return, n- number of years

Present value = $5× 1.10× 1.08^(-1)= 5.092

Present Value = $5× 1.10^2×1.08^(-2)= 5.186

Present Value in year 3 = $5× 1.10^3×1.08^(-3)= 5.28

Year 1 2 3

Present value = 5.092 5.186 5.28