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%?

Question

Quizplus · Accepted Answer

To calculate the future stock price, we need to use the dividend discount model:

P = D / (r - g)

where P is the stock price, D is the dividend, r is the required rate of return, and g is the annual growth rate of the dividend.

In the first year, the dividend is $1.75. From the second year onward, the dividend will increase by 2% annually. Therefore, the dividend in the second year will be:

D2 = $1.75 x 1.02 = $1.785

Similarly, the dividend in the third year will be:

D3 = $1.785 x 1.02 = $1.821

And so on, until the dividend in the sixth year is:

D6 = $1.967

Now we can use the dividend discount model to calculate the future stock price:

P6 = $1.967 / (0.145 - 0.02) = $15.77

Therefore, the answer is D, $15.77.

Franktown Meats Just Announced That They Are Increasing the Annual