Back to Assignment Attempts Average / 2 7. Expected dividends as a basisfor stock values A stock's current dividend is $1.00, 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 PV of the dividend paid today (Do) and the PV of the dividends expected to be paid 10, 20, and 50 years from now (D10, D50). Assume that the stock's required return (rs) is 10.40%. Time Period Now Expected Dividend's Future Value Present Value End of Year 10 End of Year 20 End of Year 50 D20, and 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. (Tool tip: Mouse over the points in the graph to see their coordinates.)
Back to Assignment Attempts Average / 2 7. Expected dividends as a basisfor stock values A stock's current dividend is $1.00, 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 PV of the dividend paid today (Do) and the PV of the dividends expected to be paid 10, 20, and 50 years from now (D10, D50). Assume that the stock's required return (rs) is 10.40%. Time Period Now Expected Dividend's Future Value Present Value End of Year 10 End of Year 20 End of Year 50 D20, and 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. (Tool tip: Mouse over the points in the graph to see their coordinates.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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7. Expected dividends as a basisfor stock values
A stock's current dividend is $1.00, 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 PV of the dividend paid today (Do) and the PV of the dividends expected to be paid 10, 20, and 50 years from now (D10,
D50). Assume that the stock's required return (rs) is 10.40%.
Time Period
Now
Expected Dividend's
Future Value Present Value
End of Year 10
End of Year 20
End of Year 50
D20, and
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. (Tool tip: Mouse over
the points in the graph to see their coordinates.)
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