Xavier company paid an annual dividend of $1.36 per share. The dividends are expected to grow at 4 percent per year for 3 more years. If the required return on the stock is 15 percent, what is the price of the stock?

Question

Quizplus · Accepted Answer

To find the price of the stock, we need to use the dividend discount model:

P = D1 / (r - g)

Where:
P = Price of stock
D1 = Dividend next year
r = Required return
g = Growth rate of the dividend

We are given that the dividend just paid was $1.36 per share. The dividend growth rate is expected to be 4% for the next 3 years. After that, we assume the dividend growth rate will be constant at the long-term growth rate of the company.

Dividend next year (D1) = 1.36 x 1.04 = 1.4144
Growth rate (g) = 4%
Required return (r) = 15%

Using the dividend discount model, we get:

P = 1.4144 / (0.15 - 0.04) * (1 - (1.04)^3 / (1.15)^3)
P = 3.22

Therefore, the price of the stock is $3.22. The correct choice is C.

Xavier Company Paid an Annual Dividend of $1