1) A reasonable way to put a value on a share of stock is to discount the stream of expected future dividends (annual payments to the shareholder) by the so-called opportunity cost of money (the interest rate you could get from the bank if you didn't hold on to the stock). If a share of stock is anticipated to pay a $5 dividend annually for the next five years and then $8 every year after that in perpetuity, what would the share be worth according to this model if the cost of money is 4%? Dividends are paid at the end of a year.
1) A reasonable way to put a value on a share of stock is to discount the stream of expected future dividends (annual payments to the shareholder) by the so-called opportunity cost of money (the interest rate you could get from the bank if you didn't hold on to the stock). If a share of stock is anticipated to pay a $5 dividend annually for the next five years and then $8 every year after that in perpetuity, what would the share be worth according to this model if the cost of money is 4%? Dividends are paid at the end of a year.
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:1) A reasonable way to put a value on a share of stock is to discount the stream of expected
future dividends (annual payments to the shareholder) by the so-called opportunity cost of
money (the interest rate you could get from the bank if you didn't hold on to the stock). If a
share of stock is anticipated to pay a $5 dividend annually for the next five years and then
$8 every year after that in perpetuity, what would the share be worth according to this model
if the cost of money is 4%? Dividends are paid at the end of a year.
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