The stock price today can be modeled as the present value of future dividends. The challenge in using this approach is (1) deciding on the right discount rate for the dividends, and (2) forecasting what future dividends will be. Assume you have already decided that the cost of equity is 10%.

You assume the dividends will have no growth across time and be $5 every year. The next dividend is 1 year from today. What percent of the current share price is attributable to the first 5 dividends? (Hint: calculate the PV of the first 5 dividends and then divide this amount by the share price). Select the number that is closest to the correct answer.

50%

32%

38%

21%