The Grist Mill just paid its annual dividend of $1.58 per share. The dividends are expected to grow at 2.7 percent per year, indefinitely. What will the price of this stock be in 7 years if investors require an annual return of 15.2 percent?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected dividend payment in year 7, using the formula:

Expected dividend payment in year 7 = Annual dividend payment x (1 + growth rate)^years

Expected dividend payment in year 7 = $1.58 x (1 + 0.027)^7 = $1.95

Next, we can use the Gordon Growth Model formula to calculate the price of the stock in year 7:

Price in year 7 = Expected dividend payment in year 7 / (Required return - Dividend growth rate)

Price in year 7 = $1.95 / (0.152 - 0.027) = $15.64

Therefore, the best choice is D) $15.64.

The Grist Mill Just Paid Its Annual Dividend of $1