A stock currently does not pay an annual dividend. An investor expects this policy to remain in force. She believes, however, the stock of this company will sell for $110.00 per share four years from now. If she has an interest (discount) rate of 7% (0.07), the dividend discount model predicts the current price of this stock should be:

Question

Quizplus · Accepted Answer

The formula for the dividend discount model is P = (D / (1+r)^1) + (D / (1+r)^2) + ... + (D / (1+r)^n) + (Pn / (1+r)^n), where P is the current price, D is the dividend payment, r is the interest rate, and Pn is the expected future stock price. Since the stock does not pay an annual dividend, the formula simplifies to P = Pn / (1+r)^n. Plugging in the values from the problem, we get P = $110 / (1+0.07)^4 = $83.92. Therefore, the answer is C.

A Stock Currently Does Not Pay an Annual Dividend