Question

JJ Industries will pay a regular dividend of $2.4 per share for each of the next four years. At the end of the four years, the company will also pay out a liquidating dividend of $53 per share, and the company will cease operations. If the discount rate is 8 percent, what is the current value of the company’s stock?

Answer 1

The current value of the company's stock is the present value of future dividends

Current Value = D1/(1+Ke)^1 + D2/(1+Ke)^2 + D3/(1+ke)^3 + D4/(1+ke)^4

where D1= Dividend at the end of year 1 i.e. $2.40

D2= Dividend at the end of year 2 i.e. $2.40

D3= Dividend at the end of year 3 i.e. $2.40

D4 = Dividend at the end of year 4 i.e. $2.40 +  liquidating dividend of $53 per share i.e. (2.40+53) $ 55.40

Current Value = 2.40/(1+0.08)^1 + 2.40/(1+0.08)^2 + 2.40/(1+0.08)^3 + 55.40/(1+0.08)^4

Current Value = 2.22+2.06+1.91+40.72

Current Value =$ 46.91

Year	Regular Dividend	Liquidating Dividend	Total Dividend	Present Value @8%
1	$            2.40		$       2.40	$            2.22
2	$            2.40		$       2.40	$            2.06
3	$            2.40		$       2.40	$            1.91
4	$            2.40	$          53.00	$    55.40	$          40.72
Current Value	$          46.91

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