Nico Corporation's common stock currently sells for $180 per share. Nico 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 Nico Corporation's stock sell for one year from now?

Question

Quizplus · Accepted Answer

The stock price one year from now can be calculated using the Gordon Growth Model: P1 = D1 / (r - g), where D1 is the dividend next year, r is the required rate of return, and g is the growth rate. D1 = $10.18 * (1 + 0.06) = $10.79. P1 = $10.79 / (0.12 - 0.06) = $179.84. However, the stock price one year from now should also include the growth of the current price: $180 * (1 + 0.06) = $190.80.

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