Ch7. 7(2) Expected dividends as a basisfor stock values

A stocks current dividend is $1.00, and dividends are expected to grow at a constant rate of 2.70% per year. The intrinsic value of a stock should equal the sum of the present value (PV) of all of the dividends that a stock is supposed to pay in the future, but many people find it difficult to imagine adding up an infinite number of dividends.

Calculate the PV of the dividend paid today (D0D0) and the PV of the dividends expected to be paid 10, 20, and 50 years from now (D10D^10, D20D^20, and D50D^50). Assume that the stocks required return (rsrs) is 8.40%.

Time Period	Expected Dividends
	Future Value	Present Value
Now
End of Year 10
End of Year 20
End of Year 50

Using the grey curve (star symbols), plot the present value of each of the expected future dividends for years 10, 20, and 50. The resulting curve will illustrate how the PV of a particular dividend payment will decrease depending on how far from today the dividend is expected to be received.

Note: Round each of the discounted values of the of dividends to the nearest tenth decimal place before plotting it on the graph. (Tool tip: Mouse over the points in the graph to see their coordinates.)