Answer:
The appropriate answer is E, $23.89
Explanation:
To estimate today's stock value, we discount all the dividends due from the stock, which are $0.9 in year one, $1.8 in year two, and $3.6 in year three, plus those continuing indefinitely.
To account for dividends in perpetuity, the amount $3.6 is divided by the 13% cost of capital.
It's crucial to understand that the perpetuity discounting factor mirrors the year 3 discounting factor.
Yearly Dividends DCF=(1+r)^n Present Value
1 0.9 0.885 0.80
2 1.8 0.783 1.41
3 3.6 0.693 2.49
4 27.69 0.693 19.19
the cumulative present values totaled to 23.89
As $0.45 has recently been paid, the subsequent year's dividend will be doubled, and this pattern will continue.
