XYZ Corporation's next dividend is expected to be $3 per share. Dividend growth rate has been at 2% and expected to be so into the future. If investor's return is 10%, calculate the stock price in year 4.
A) $39.4
B) $40.0
C) $40.6
D) $41.2
E) $41.8

Question

Quizplus · Accepted Answer

The stock price in year 4 can be calculated using the Gordon Growth Model (Dividend Discount Model). The formula is P = D / (r - g), where D is the dividend in year 5, r is the required rate of return, and g is the growth rate. First, calculate the dividend in year 5: D5 = $3 * (1 + 0.02)^4 = $3.249. Then, P4 = $3.249 / (0.10 - 0.02) = $40.6125, which rounds to $40.6.

XYZ Corporation's Next Dividend Is Expected to Be $3 Per