You buy a stock for which you expect to receive an annual dividend of $2.10 for the fifteen years that you plan on holding it. After 15 years, you expect to sell the stock for $32.25. What is the present value of a share for this company if you want a 10%
A) $7.72
B) $15.97
C) $23.69
D) $31.41
Answer: C
Explanation: C) Keep in mind that the future price in 15 years in $32.25. Thus, we are not only concerned with the present value of the annuity from the $2.10 dividend, but also the present value of $32.25. With r = 10% and n = 15, we get PVIFA = 7.60608. Thus, for the annuity component we have: $2.10 × 7.60608 = $15.973. For $32.25, with r = 10% and n = 15, we get PVIF = 0.239392. Thus, for the present value of the selling price, we have: $32.25 × 0.239392 = $7.720. Thus, the present value of a share = P = $15.973 + $7.720 = $23.693 or $23.69 to the nearest cent.
MODE = END
INPUT 15 10 ? -2.1 -32.25
KEY N I/Y PV PMT FV
CPT 23.69
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