If next year's dividend is forecast to be $5.00, the constant growth rate is 4%, and the discount rate is 16%, then the current stock price should be:

Question

Quizplus · Accepted Answer

We can use the constant growth dividend discount model to solve this problem:

Stock Price = D1 / (r-g)

Where:
D1 = Next year's dividend = $5.00
r = Discount rate = 16%
g = Constant growth rate = 4%

Plugging in the values, we get:

Stock Price = $5.00 / (0.16 - 0.04) = $41.67

Therefore, the current stock price should be $41.67, which is option C).

If Next Year's Dividend Is Forecast to Be $5