The Back Room just paid an annual dividend of $1.75 a share. The firm expects to pay dividends forever and to increase the dividend by 3.5 percent annually. What is the expected value of this stock six years from now if the discount rate is 10 percent?

Question

Quizplus · Accepted Answer

To find the expected value of the stock six years from now, we need to first find the dividend in Year 7 (one year from now) and then find the value of the stock at the end of Year 6 (today).

Dividend in Year 7 = Dividend in Year 6 x (1 + dividend growth rate) 
Dividend in Year 7 = $1.75 x (1 + 3.5%) = $1.81

Next, we can use the Gordon growth model to find the value of the stock today:

Value of stock = Dividend in Year 7 / (discount rate - dividend growth rate) 
Value of stock = $1.81 / (10% - 3.5%) = $34.25

Therefore, the expected value of the stock six years from now is $34.25.

The correct answer is (C).

The Back Room Just Paid an Annual Dividend of $1