Spooner Corporation's next dividend is expected to be $6. Dividend growth is estimated at 25%, 20%, 10% and then stabilize to 3%. If the rate of return is 10%, determine the stock price in year 2.
A) $98.64
B) $99.61
C) $100.64
D) $101.64
E) $102.64

Question

Quizplus · Accepted Answer

To find the stock price in year 2, calculate the dividends for the first few years and the terminal value at year 2. The dividends are: D1 = $6 * 1.25 = $7.50, D2 = $7.50 * 1.20 = $9.00. The terminal value at year 2 is D3 / (r - g) = ($9.00 * 1.10) / (0.10 - 0.03) = $141.43. The stock price in year 2 is the present value of D3 and the terminal value, discounted back to year 2: ($9.90 + $141.43) / (1.10)^2 = $100.64.

Spooner Corporation's Next Dividend Is Expected to Be $6