Question

acobs Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent?

Answer 1

Dividends over next 5 years will be:

$0, $0 $2.5, $3 ,$3

For calculating the present values of the dividends, we will use the following formula:

PV = FV / (1 + r%)n

where, FV = Future value, PV = Present value, r = rate of interest = 15%, n= time period

For calculating the present value of the dividends, we will calculate the present values of all the years and add them up. Now,putting the values in the above equation, we get,

PV = $0 / (1 + 15%) + $0 / (1 + 15%)2  + $2.5 / (1 + 15%)3 + $3 / (1 + 15%)4 + $3 / (1 + 15%)5

PV = $0 + $0  + $2.5 / (1 + 0.15)3 + $3 / (1 + 0.15%)4 + $3 / (1 + 0.15%)5

PV = $0  + $0  + $2.5 / (1.15)3 + $3 / (1.15)4 + $3 / (1.15)5

PV = $2.5 / 1.520875 + $3 / 1.7490025 + $3 / 2.0113571875

PV = $1.6437905810 + $1.715226341443194 + $1.4915302058

PV = $4.85

So, required present value of dividends is $4.85.