KB Adventures will pay an annual dividend of $3.15 a share on their common stock next week. Last year, the company paid a dividend of $3.00 a share. The company adheres to a constant rate of
Growth dividend policy. What will one share of this common stock be worth ten years from now if
The applicable discount rate is 12.5%?

Question

Quizplus · Accepted Answer

Using the constant rate of growth dividend formula, we can calculate the expected dividend per share in year 10:
D10 = D1(1+g)^10
D10 = $3.15(1+0.05)^10
D10 = $5.03

Next, we can use the dividend discount model to calculate the expected stock price in year 10:
P10 = D10/(r-g)
P10 = $5.03/(0.125-0.05)
P10 = $68.41

Therefore, one share of this common stock will be worth $68.41 ten years from now if the applicable discount rate is 12.5%. Option D is the correct choice.

KB Adventures Will Pay an Annual Dividend of $3