Gee-Gee's is going to pay an annual dividend of $2.05 a share next year. This year, the company paid a dividend of $2 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth six years from now if the applicable discount rate is 11.2 percent?

Question

Quizplus · Accepted Answer

Using the constant rate of growth formula for dividends, we can find the expected dividend for year 6:

D6 = D1(1+g)^6
D6 = $2.05(1+0.025)^6
D6 = $2.43

Next, we can use the dividend discount model (DDM) to find the value of the stock:

P0 = D1/(r-g)
P6 = D6/(r-g)
P6 = $2.43/(0.112-0.025)
P6 = $27.33

Therefore, one share of this common stock will be worth $27.33 six years from now. The best choice is D.

Gee-Gee's Is Going to Pay an Annual Dividend of $2