Franktown Meats just announced that they are increasing the annual dividend to $1.75 and establishing a policy whereby the dividend will increase by 2% annually thereafter. How much will one share of this stock be worth six years from now if the required rate of return is 14.5%?
A) $14.00
B) $14.28
C) $14.84
D) $15.77
E) $16.08

Question

Quizplus · Accepted Answer

The correct answer is D because the dividend will increase by 2% annually, so the dividend in six years will be $1.75 * (1.02)^6 = $1.95. The stock price can be calculated using the dividend discount model: Price = Dividend / (Required Rate of Return - Dividend Growth Rate). Plugging in the values, we get Price = $1.95 / (0.145 - 0.02) = $15.77.

Franktown Meats Just Announced That They Are Increasing the Annual