S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. Last week,the company paid a dividend of $2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of S&P common stock be worth ten years from now if the applicable discount rate is 8%?

Question

Quizplus · Accepted Answer

To find the future price of a share of S&P common stock, we need to use the dividend discount model.

First, calculate the dividend growth rate: 
Dividend growth rate = (Next year's dividend - Current year's dividend) / Current year's dividend
= ($2.08 - $2.00) / $2.00
= 0.04 or 4%

Next, calculate the present value of all future dividends:
PV = D / (r - g)
where PV is the present value of all future dividends, D is the dividend in the next year, r is the discount rate, and g is the dividend growth rate.

PV = $2.08 / (0.08 - 0.04)
PV = $52

Finally, calculate the future price of the stock using the present value and the expected growth rate:
Future price = PV * (1 + g)^n
where n is the number of years in the future.

Future price = $52 * (1 + 0.04)^10
Future price = $76.97

Therefore, the answer is C: $76.97

S&P Enterprises Will Pay an Annual Dividend of $2