Remember that the formula for an annuity, which we have to use,
works only if payments are made at the end of an interest period.
Make a time graph to make sure you get the times correct
At the beginning of year 5,
PV = 8500( 1 - 1.075^-8)/.075
Now, we have bring that value to the left 4 interest periods, so
PV of the dividends
= (1.075^-4)[8500( 1 - 1.075^-8)/.075]
= ....
2nd part of your question:
PV of the 8 dividends, the first one a year from now
= 8500( 1 - 1.075^-8)/.075
= ...
If the first payment is received now, then only 7 remaining dividends
fit the formula, so
PV = 8500 + 8500( 1 - 1.075^-7)/.075
= ....
I will let you do all that button-pushing on your calculator
mr bob is to receive an annual dividend of #8,500 for 8years.the first dividends comes in at thr end of 5years.determine the present value of his dividend income if the relevant rate is 7.5%p.a
(2):in the above question above, suppose the first dividend comes in a year from now,what will be the present value of the dividends? will the result be different if the first dividend is received now?
1 answer