Upwind Tours just announced that it will pay an annual dividend of $3.60 a share one year from now. Two years from now, the company expects to pay a $28 a share liquidating dividend. After that, the company will cease operations. What is the current value per share at a discount rate of 12.5 percent?

The correct answer is $25.32.

Explanation:

According to the scenario, the given data are as follows:

Dividend for 1st year (D1) = $3.60

Dividend for 2nd year (D2) = $28

Discount rate (r) = 12.5%

So, we can calculate the current value per share by using following formula:

Current value = (D1 : (1+r) ^1) + (D2 : (1+r) ^2)

= ($3.60: (1+12.5%) ^1) + ($28: (1+12.5%) ^2)

= ($3.60 : 1.125) + ($28 : 1.265625)

= $3.2 + $22.123

= $25.32