ABC Corporation has just paid a $4 dividend. Dividend growth rate has been at 3% and expected to be so into the future. If investor's return is 12%, calculate the stock price in year 5.

Question

Quizplus · Accepted Answer

The stock price in year 5 can be calculated using the Gordon Growth Model (Dividend Discount Model). The formula is P = D1 / (r - g), where D1 is the dividend in year 6, r is the required rate of return, and g is the growth rate. First, calculate the dividend in year 6: D6 = $4 * (1 + 0.03)^6 = $4.77. Then, P5 = $4.77 / (0.12 - 0.03) = $53.07.

ABC Corporation Has Just Paid a $4 Dividend