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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

Respuesta :

Answer:

$53.11

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

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