Question

Home Parties is paying an annual dividend of $1.25 every other year. The last dividend was paid last year. The firm will continue this policy until two more dividend payments have been paid. One year after the last normal dividend payment, the company plans to pay a final liquidating dividend of $25 per share. What is the current market value of this stock if the required return is 17 percent?
$17.14
$18.92
$15.19
$13.16
$17.53

Answer 1

Answer:

The answer is: $15.19

Explanation:

We have to calculate the present value of the 3 future cash flows of Home Parties. After the third year, Home Parties will shut down, so no more cash flows are expected.

• Cash flow year 1 = 1.25
• Cash flow year 3 = 1.25
• Cash flow year 4 = 25

We can use an excel spreadsheet to calculate the present value, but since the operations are quite simple, we can also do them by ourselves.

PV = (1.25 / 1.17) + (1.25 / 1.17³) + (25 / 1.17⁴) = 1.07 + 0.78 + 13.34 = $15.19