Assume that Bolton Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid.After that, the dividend is expected to increase at a constant rate of 5%.If you require a 12% return on the stock, the value of the stock is

Question

Quizplus · Accepted Answer

The correct answer is A because the value of the stock is $28.57. The dividend is expected to increase at a constant rate of 5%, so the dividend in year 2 will be $2.00 * (1 + 0.05) = $2.10. The dividend in year 3 will be $2.10 * (1 + 0.05) = $2.205, and so on. The present value of these dividends is:PV = $2.00 / (0.12 - 0.05) = $28.57

Assume That Bolton Company Will Pay a $2