Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i.e., what is ?
A) $37.52
B) $39.40
C) $41.37
D) $43.44
E) $45.61

Question

Quizplus · Accepted Answer

$\begin{array}{lr}
\text { Next expected dividend  =   = } & \$ 1.60 \
\text {Required return }  &11.0 \% \
\text { Dividend yield }=\mathrm{D}_{1} / \mathrm{P}_{0}=  &6.0 \% \
\text {Find the growth rate: g =rs-   yield=  }  & 5.0 \% \
\text { Expected dividend }=\mathrm{P}_{0}=\mathrm{D}_{1}\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 26.67 \
\text { Years in the future }  &7\
\tilde{\mathrm{P}}_{7}=\mathrm{P}_{0}(1+g)^{7} & \$ 37.52 \
\end{array}$