Merriweather's has a policy of increasing its annual dividend by 1.75 percent each year.How much will one share be worth five years from now if the required rate of return is 15 percent and the next dividend will be $3.40?
A)$28.48
B)$27.99
C)$34.84
D)$28.60
E)$32.78

Question

Quizplus · Accepted Answer

First, we need to calculate the future value of the next dividend (in year 1):

$3.40 * (1 + 0.0175) = $3.46

Then, we can use the Gordon growth model to calculate the future share price:

$P = \frac{D_1}{r-g}

where P is the share price, D1 is the future dividend, r is the required rate of return, and g is the dividend growth rate.

Plugging in the numbers:

$P = \frac{3.46}{0.15 - 0.0175} = $27.99

Therefore, one share will be worth $27.99 five years from now. Option B is the correct answer.

Merriweather's Has a Policy of Increasing Its Annual Dividend by 1.75