The KLS Co. is expected to pay the following annual dividends for the next three years: $1.00, $1.50, and $1.60, respectively. After that time, it is expected to increase its dividends by 3% annually. Stocks similar to KLS are yielding 9.5%. What is one share of KLS worth today?

A) $22.69
B) $23.87
C) $27.05
D) $27.30
E) $29.20

Question

Nayana Santhosh · Accepted Answer

Final Answer : A, Explanation :  The correct answer is A because the present value of the expected dividends is $22.69. This is calculated by using the formula for the present value of a growing perpetuity, which is:PV = D / (r - g)where:PV is the present valueD is the annual dividendr is the required rate of returng is the growth rateIn this case, the annual dividend is $1.60, the required rate of return is 9.5%, and the growth rate is 3%. Plugging these values into the formula, we get:PV = $1.60 / (0.095 - 0.03) = $22.69

Definitions

Learning Objectives

Learning Objectives

Related questions