Question

ack to Assignment Attempts: Keep the Highest: /2 2. Expected dividends as a basis for stock values The following graph shows the value of a stock's dividends over time. The stock's current dividend is $1.00 per share, and dividends are expected to grow at a constant rate of 3.50% per year. The intrinsic value of a stock should equal the sum of the present value (PV) of all of the dividends that a stock is supposed to pay in the future, but many people find it difficult to imagine adding up an infinite number of dividends. Calculate the present value (PV) of the dividend paid today (Do) and the discounted value of the dividends expected to be paid 10 and 20 years from now (Dio and D20 ). Assume that the stock's required return (Is) is 10.40%. Note: Carry and round the calculations to four decimal places. Dividend's Expected Future Value Expected Dividend's Present Value Time Period Now End of Year 10 End of Year 20 End of Year 50 Using the orange curve (square symbols), plot the present value of each of the expected future dividends for years 10, 20, and 50. The resulting curve will illustrate how the PV of a particular dividend payment will decrease depending on how far from today the dividend is expected to be received. Note: Round each of the discounted values of the of dividends to the nearest tenth decimal place before plotting it on the graph. You can mouse over the points in the graph to see their coordinates.

Answer 1

Time period Dividend's Expected Future Value Expected Dividend's Present Value $ 1.0000 Now End of Year 10 $ 1.4106 =1*(1+3.5%)^10 $ 0.5245 =1.4106/(1+10.4%)^10 End of Year 20 $ 1.9898 $ 0.2751 =1*(1+3.5%)^20 =1.9898/(1+10.4%)^20 End of Year 50 $ 5.5849 $ 0.0397 =1*(1+3.5%)^50 =5.5849/(1+10.4%)^50

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