What if the company goes out of business in fifteen years and thus pays an annual dividend of $2.10 for only those fifteen years? What is the present value of a share for this company if we want a 10% return on the stock?
A) $15.97
B) $16.97
C) $17.97
D) $18.97
Answer: A
Explanation: A) Keep in mind that the future price in 15 years is zero so that any discounted value is also zero. Thus, we are only concerned with the present value of the annuity from the $2.10 dividend. For this annuity, with r = 10% and n = 15, we get PVIFA = 7.60608, giving the present value of a share = P= $2.10 × 7.60608 = $15.973 or about $15.97.
MODE = END
INPUT 15 10 ? -2.1 0
KEY N I/Y PV PMT FV
CPT 15.97
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