When the stock price is 20 and the present value of dividends is 2, which of the following is the recommended way of constructing a tree?
A. Draw a tree for an initial stock price of 20 and subtract the present value of future dividends at each node
B. Draw a tree for an initial stock price of 22 and subtract the present value of future dividends at each node
C. Draw a tree with an initial stock price of 18 and add the present value of future dividends at each node
D. Draw a tree with an initial stock price of 18 and add 2 at each node
C
We first subtract the present value of dividends from the initial stock price. We then draw the tree and then add back the present value of future dividends at each node
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