Rylan Industries is expected to pay a dividend of $5.20 year for the next four years.If the current price of Rylan stock is $32.63,and Rylan's equity cost of capital is 14%,what price would you expect Rylan's stock to sell for at the end of the four years?

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Quizplus · Accepted Answer

The correct answer is A. $29.52. The price of the stock at the end of the four years can be calculated using the dividend discount model:P0 = D1 / (r - g) + D2 / (r - g)^2 + D3 / (r - g)^3 + D4 / (r - g)^4where:P0 is the current price of the stockD1, D2, D3, and D4 are the dividends paid in years 1, 2, 3, and 4, respectivelyr is the equity cost of capitalg is the growth rate of dividendsIn this case, we have:P0 = $32.63D1 = $5.20D2 = $5.20D3 = $5.20D4 = $5.20r = 14%g = 0%Plugging these values into the formula, we get:P0 = $5.20 / (0.14 - 0) + $5.20 / (0.14 - 0)^2 + $5.20 / (0.14 - 0)^3 + $5.20 / (0.14 - 0)^4= $5.20 / 0.14 + $5.20 / 0.14^2 + $5.20 / 0.14^3 + $5.20 / 0.14^4= $37.14 + $26.53 + $18.95 + $13.54= $96.16Therefore, the price of the stock at the end of the four years is expected to be $96.16.

Rylan Industries Is Expected to Pay a Dividend of $5