B&K Enterprises will pay an annual dividend of €2.08 a share on its ordinary equity next year.Last week, the company paid a dividend of €2.00 a share.The company adheres to a constant rate of growth dividend policy.What will one share of B&K ordinary equity be worth ten years from now if the applicable discount rate is 8%?

Question

Quizplus · Accepted Answer

We can use the constant rate of growth dividend formula to calculate the future value of the stock:

D1 = D0(1+g)
D10 = D1(1+g)^9  (since we want the value ten years from now)
P9 = D10/(r-g)

Where:
D0 = the most recent dividend payment = €2.00
D1 = next year's dividend payment = €2.08
g = the constant rate of growth in dividends
r = the discount rate

First, we need to solve for g:
g = (D1/D0) - 1 = (€2.08/€2.00) - 1 = 0.04 or 4%

Then, we can plug in the values to solve for P9:
D10 = €2.08(1+0.04)^9 = €3.1725
P9 = €3.1725/(0.08-0.04) = €76.97

Therefore, the answer is C) €76.97.

B&K Enterprises Will Pay an Annual Dividend of €2