The Red Bud Co. pays a constant dividend of $2.90 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.5 percent

The answer is $5.13

Explanation:

This question will be solved using the Dividend Discount Model. It is one of the valuation methods used in valuing price of Equity/stock.

Po = D1 + (1 + r)^n + D2 + (1 + r)^n

Po is the current worth of stocks

r is the discount rate

n is the number of years

2.9/1.085^1 + 2.9/1.085^2

2.9/1.085 + 2.9/1.177225

$2.67 + 2.46

=$5.13

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