The Red Bud Co. pays a constant dividend of $2.90 a share. The company announced
ID: 2781814 • Letter: T
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?
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?
Explanation / Answer
Value of Stock = PV of all future dividends
= 2.90/1.085 + 2.90/1.0852
= 2.6728 + 2.4634
= 5.1362
Hence, the value of stock today is $5.1362