Assume that Malnava 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

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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. The present value of the dividends is:PV = $2.00 / (0.12 - 0.05) + $2.10 / (0.12 - 0.05)^2 + $2.205 / (0.12 - 0.05)^3 = $28.57

Assume That Malnava Company Will Pay a $2