A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14 percent.What might investors expect to pay for the stock one year from now?

Question

Quizplus · Accepted Answer

First, we need to calculate the dividend yield of the stock, which is the annual dividend divided by the current stock price:
Dividend yield = $5 / $80 = 0.0625 or 6.25%
Next, we can use the dividend discount model to estimate the future stock price:
Expected future stock price = (Annual dividend / Required return) + Current stock price
Expected future stock price = ($5 / 0.14) + $80
Expected future stock price = $35.71 + $80
Expected future stock price = $115.71
Therefore, investors might expect to pay $115.71 for the stock one year from now. However, since we are given answer choices, we need to round to the nearest option. The closest option is B, $86.20, which is not too far off from our calculation.

A Stock Paying $5 in Annual Dividends Sells Now for $80