B&K Enterprises will pay an annual dividend of €2.08 a share on its ordinary equity next year.Last week,the company paid a dividend of €2.00 a share.The company adheres to a constant rate of growth dividend policy.What will one share of B&K ordinary equity be worth ten years from now if the applicable discount rate is 8%?
A)€71.16
B)€74.01
C)€76.97
D)€80.05
E)€83.25

Question

Quizplus · Accepted Answer

We can use the dividend discount model to calculate the stock price in 10 years:

D1 = D0 × (1 + g) = €2.00 × (1 + 0.04) = €2.08 (since the dividend grows at a constant rate of 4% per year)
P10 = D11 ÷ (r – g) = €2.08 × (1 + 0.04) ÷ (0.08 – 0.04) = €76.97

Therefore, choice C is the correct answer.

B&K Enterprises Will Pay an Annual Dividend of €2