Global Logistics just announced it is increasing its annual dividend to $1.68 next year and will increase that dividend by 1.85 percent annually thereafter. How much will one share of this stock be worth ten years from now if the required rate of return is 12.8 percent?
A) $18.43
B) $18.26
C) $18.09
D) $19.12
E) $18.77

Question

Quizplus · Accepted Answer

The stock price can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing perpetuity): P = D1 / (r - g), where D1 is the dividend next year, r is the required rate of return, and g is the growth rate. Here, D1 = $1.68, r = 12.8% or 0.128, and g = 1.85% or 0.0185. The price today is P0 = 1.68 / (0.128 - 0.0185) = $18.43.

Global Logistics Just Announced It Is Increasing Its Annual Dividend