Harry Corporation's common stock currently sells for $180 per share. Harry just paid a dividend of $10.18 and dividends are expected to grow at a constant rate of 6 percent forever. If the required rate of return is 12 percent, what will Harry Corporation's stock sell for one year from now?
A) $190.64
B) $187.04
C) $195.40
D) $179.84

Question

Quizplus · Accepted Answer

The stock price one year from now can be calculated using the dividend discount model for a perpetuity, which is P1 = D1 / (r - g), where P1 is the price one year from now, D1 is the dividend one year from now, r is the required rate of return, and g is the growth rate. The dividend one year from now, D1, is the dividend just paid, $10.18, grown by the growth rate, 6%, so D1 = $10.18 * (1 + 0.06) = $10.79108. Plugging into the formula gives P1 = $10.79108 / (0.12 - 0.06) = $179.85. However, since the question asks for the stock price one year from now and the calculated price is essentially the present value, we need to adjust for the growth over the next year to find the future value. Therefore, the correct future stock price is $179.85 * (1 + 0.06) = $190.64.

Harry Corporation's Common Stock Currently Sells for $180 Per Share