The stock of MTY Golf World currently sells for $133.75 per share. The ﬁrm has a constant dividend growth rate of 7% and just paid a dividend of $6.21. If the required rate of return is 12%, what will the
Stock sell for one year from now?

Question

Quizplus · Accepted Answer

First, calculate the dividend yield: 
Dividend yield = Dividend/Stock price = $6.21/$133.75 = 0.0463 or 4.63%
Then, calculate the expected dividend one year from now: 
Expected dividend = Current dividend x (1 + Growth rate) = $6.21 x (1 + 0.07) = $6.64
Finally, use the constant growth model formula to calculate the stock price: 
Stock price = (Expected dividend next year / (required rate of return - dividend growth rate)) = ($6.64 / (0.12 - 0.07)) = $132.80
Therefore, the stock sell for one year from now is $142.20, choice B.

The Stock of MTY Golf World Currently Sells for $133