Question

4. You are considering purchasing shares of New Wave Technology Corp. The company has stated that they will pay dividends of $.84 per share every 3 months with the first dividend paid exactly 3 years from today. If the current interest rates are 5.6% compounded monthly, what would you be willing to pay for one share today?

Answer 1

The formula used yo calculate the present value

Let Present value be x, then future value after 3 years will be x + 0.84.

Now, Period interest rate when compounded monthly = 5.6% /12 = 0.672

N = 3* 4 as the period for dicounting the present value is 3 years and the dividend is paid every 3 months i.e. 4 times a year.

Now,

So, the present value that the person will be willing to pay is $14.736 per share.

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