A stock is expected to pay a $4.00 dividend per share. The growth rate is expected to be 5 percent. If investors demand 10 percent on this stock, what is the expected price of the stock 10 years from now?
A) $94.68
B) $92.17
C) $130.31
D) $126.93

Question

Quizplus · Accepted Answer

The expected price of the stock 10 years from now can be calculated using the dividend discount model for a growing dividend, which is P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate. However, since we're looking for the price 10 years from now, we first need to calculate the dividend in 10 years, which is D10 = D0 * (1 + g)^10, where D0 is the current dividend. So, D10 = $4.00 * (1 + 0.05)^10 = $4.00 * 1.62889 = $6.52 approximately. Then, we use the dividend discount model with this future dividend: P10 = D10 / (r - g) = $6.52 / (0.10 - 0.05) = $130.40, which, due to rounding in the calculation, closely matches option C, $130.31.

A Stock Is Expected to Pay a $4