Long Life Floors just paid an annual dividend of $.82 a share and plans on increasing future dividends by 2 percent annually. The discount rate is 15 percent. What will the value of this stock be five years from today?

Question

Quizplus · Accepted Answer

We can use the Gordon Growth Model to calculate the stock value:

D1 = D0(1+g) where D1 is the dividend next year, D0 is the current dividend, and g is the annual dividend growth rate.

D1 = $.82(1+.02) = $.8364

Using the formula for stock value:

P = D1 / (r - g) where r is the discount rate

P = $.8364 / (.15 - .02) = $7.10

Therefore, the value of this stock will be $7.10 five years from today.

Long Life Floors Just Paid an Annual Dividend of