A stock has an annual dividend of $10.00 and it is expected not to grow. It is believed the stock will sell for $100 one year from now, and an investor has a discount (interest) rate of 6% (0.06). The dividend discount model predicts the stock's current price should be:

Question

Quizplus · Accepted Answer

The dividend discount model for a stock with no growth is P = (D + Pn) / (1 + r), where P is the price, D is the dividend, Pn is the price in one year, and r is the discount rate. Plugging in the values: P = ($10 + $100) / (1 + 0.06) = $110 / 1.06 = $103.77.

A Stock Has an Annual Dividend of $10