Waterfront Solutions,Inc.paid a dividend of $5.00 per share on its common stock yesterday.Dividends are expected to grow at a constant rate of 4% for the next two years,at which point the stock is expected to sell for $56.00.If investors require a rate of return on Waterfront's common stock of 18%,what should the stock sell for today?

Question

Quizplus · Accepted Answer

To calculate the current stock price, we need to use the dividend discount model:
P0 = D1 / (r - g)

Where:
D1 = expected dividend one year from now = $5.00 x 1.04 = $5.20
r = required rate of return = 18%
g = expected growth rate = 4%

We can then plug in the values and solve for P0:
P0 = $5.20 / (0.18 - 0.04) = $48.51

Therefore, the stock should sell for $48.51 today, which is answer choice B.