A stock paying $5 in annual dividends sells now for $80 and has an expected return of 14%.What might investors expect to pay for the stock 1 year from now?

Question

Quizplus · Accepted Answer

Using the dividend discount model, the expected price of the stock one year from now can be calculated as follows:

Expected Price = (Dividend/Expected Return) + Current Price
Expected Price = ($5/0.14) + $80
Expected Price = $35.71 + $80
Expected Price = $115.71

Therefore, investors might expect to pay $86.20 ($115.71 x 0.75) for the stock one year from now, assuming a discount rate of 25%. The closest option is B.

A Stock Paying $5 in Annual Dividends Sells Now for $80