Assume that Bolton Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, the value of the stock is

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The correct answer is A because the value of the stock is $28.57. The dividend is expected to increase at a constant rate of 5%, so the dividend in year 2 will be $2.00 * 1.05 = $2.10. The dividend in year 3 will be $2.10 * 1.05 = $2.205. The dividend in year 4 will be $2.205 * 1.05 = $2.315. The dividend in year 5 will be $2.315 * 1.05 = $2.432. The present value of these dividends is $2.00 / (0.12 - 0.05) + $2.10 / (0.12 - 0.05)^2 + $2.205 / (0.12 - 0.05)^3 + $2.315 / (0.12 - 0.05)^4 + $2.432 / (0.12 - 0.05)^5 = $28.57.

Assume That Bolton Company Will Pay a $2