Rogue Motors Inc.has a 11% required rate of return.The firm does not expect to initiate dividends for 10 years,at which time it will pay $2.00 per share in dividends.At that time,the firm expects its dividends to grow at 6% forever.What is an estimate of the firms' price in 10 years (P₁₀)if its dividend at the end of year 10 is $2.00?

Question

Quizplus · Accepted Answer

The correct answer is A because the estimated price of the firm in 10 years is $42.40. This is calculated using the formula P10 = D10 / (r - g), where D10 is the dividend at the end of year 10 ($2.00), r is the required rate of return (11%), and g is the growth rate of dividends (6%).