4. Expected dividends as a basis for stock values

The following graph shows the value of a stocks dividends over time. The stocks current dividend is $1.00 per share, and dividends are expected to grow at a constant rate of 4.50% 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 present value (PV) of the dividend paid today (D) and the discounted value of the dividends expected to be paid 10, 20, and 50 years from now (D10, D20, D50D10, D20, D50). Assume that the stocks required return (rss) is 5.40%.

Note: Carry and round the calculations to four decimal places.

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

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

Note: Round each of the discounted values of the dividends to the nearest tenth decimal place before plotting it on the graph. You can mouse over the points in the graph to see their coordinates.

10.00 Expected Dividends 8.00 FV of Dividends 6.00 DIVIDENDS ($) 4.00 PV of Dividends 10 20 YEARS