A stock is expected to pay a $4.00 dividend per share. The growth rate is expected to be -1%. If investors demand 8% on this stock, what is the expected price of the stock 3 years from now?
A) $54.68
B) $52.17
C) $41.06
D) $43.12

Question

Quizplus · Accepted Answer

The expected price of the stock 3 years from now can be calculated using the Gordon Growth Model (Dividend Discount Model). The formula is P = D / (r - g), where D is the dividend, r is the required rate of return, and g is the growth rate. The dividend in 3 years will be $4 * (1 - 0.01)^3 = $3.88. The price is then $3.88 / (0.08 + 0.01) = $43.12.

A Stock Is Expected to Pay a $4