Springboro Tech is a young start-up company. No dividends will be paid on the stock over the next 15 years, because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend in 16 years and will increase the dividend by 3 percent per year thereafter. What is the current share price if the required return on this stock is 8 percent?

Question

Quizplus · Accepted Answer

The correct answer is A because the current share price is $75.66. This is calculated using the dividend discount model, which takes into account the present value of all future dividends. The required return is 8%, and the dividend in 16 years is $12. The dividend will increase by 3% per year thereafter.

Springboro Tech Is a Young Start-Up Company