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Great American Coal company just announced that it will pay an annual dividend of $3.60 a share one year from now. Two y...

Great American Coal company just announced that it will pay an annual dividend of $3.60 a share one year from now. Two years from now, the company expects to pay a $28 a share liquidating dividend. After that, the company will cease operations. What is the current value per share at a discount rate of 12.5%? Is it A.$25.32, B.$24.28,C.$29.88, D.$26.75?

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Answer #1

Current value of share = Present value of future cash inflows

Current value of share = 3.6 / (1 + 0.125)1 + 28 / (1 + 0.125)2

Current value of share = 3.2 + 22.123457

Current value of share = $25.32

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