S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next year.The firm just paid a dividend of $2.00 a share and adheres to a constant rate of growth dividend policy.What will one share of S&P common stock be worth ten years from now if the applicable discount rate is 8 percent?

Question

Quizplus · Accepted Answer

Using the constant growth dividend model, we can determine the future stock price as follows:

D1 = D0 x (1 + g)
D1 = $2.08
D0 = $2.00
g = (D1 - D0) / D0 = ($2.08 - $2.00) / $2.00 = 0.04 or 4%

Next, we can use the formula for the present value of a constant growth dividend to find the current intrinsic value of the stock:

P0 = D1 / (r - g)
P0 = $2.08 / (0.08 - 0.04) = $52.00

Finally, we can use the formula for the future value of a single cash flow to find the stock price 10 years from now:

P10 = P0 x (1 + r)^10
P10 = $52.00 x (1 + 0.08)^10 = $76.97

Therefore, the best choice is C, $76.97.

S&P Enterprises Will Pay an Annual Dividend of $2