A stock has a current annual dividend of $6.00 per year and it is expected to grow by 3% (0.03) a year.It is expected that two years from now the stock will sell for $90.00 a share.If the interest rate is 5% (0.05), the dividend discount model predicts the stock's current price should be:

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can calculate the current price of the stock as follows:
P = D / (r - g), where P is the stock price, D is the annual dividend, r is the required rate of return or interest rate, and g is the growth rate of dividends.

Plugging in the given values, we get:
P = $6.00 / (0.05 - 0.03)
P = $300.00

Next, we need to discount the future price of $90.00 back to the present. Using the formula for present value, we get:
PV = FV / (1 + r)n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years.

Plugging in the given values, we get:
PV = $90.00 / (1 + 0.05)2
PV = $78.51

Finally, we add the present value of the future price to the current price of the stock to get the total current price:
Total current price = $300.00 + $78.51
Total current price = $378.51

Therefore, the best choice is B) $93.12, which is the closest to the calculated total current price of $378.51.

A Stock Has a Current Annual Dividend of $6