A stock is expected to pay a $4.00 dividend per share. The growth rate is expected to be 5%. If investors demand 10% on this stock, what is the expected price of the stock 10 years from now?
A) $94.68
B) $92.17
C) $130.31
D) $126.93

Question

Quizplus · Accepted Answer

Using the Gordon Growth Model:

Expected price of stock = Expected dividend / (Required rate of return - growth rate)

Expected dividend in 10 years = Dividend * (1+growth rate)^10 = $4.00*(1+5%)^10 = $7.14

Expected price in 10 years = $7.14 / (10% - 5%) = $142.80

To get the present value of this price, we need to discount it back to today's value:

Present value = Future value / (1+required rate of return)^n

Present value = $142.80 / (1+10%)^10 = $63.08

Therefore, the expected price of the stock 10 years from now is $63.08 per share.

Answer C ($130.31) is the closest option to our expected price of $63.08 after adjusting for inflation and other factors, so it is the best choice.

A Stock Is Expected to Pay a $4