B&K Enterprises will pay an annual dividend of $2.08 a share on its common stock next year.Last week, the company paid a dividend of $2.00 a share.The company adheres to a constant rate of growth dividend policy.What will one share of B&K common stock be worth ten years from now if the applicable discount rate is 8%?

Question

Quizplus · Accepted Answer

First, we need to calculate the annual growth rate of the dividend using the information given:

Annual dividend next year = $2.08 per share
Dividend paid last week = $2.00 per share
Growth in dividend = ($2.08 - $2.00) / $2.00 = 4.00%

Next, we can use the constant growth dividend model to calculate the future stock price:

D1 = $2.08 (next year's dividend)
g = 4.00% (growth rate)
r = 8% (discount rate)

P10 = D1 / (r - g) * (1 - (1 + g) / (1 + r)^10)

P10 = $2.08 / (0.08 - 0.04) * (1 - (1 + 0.04) / (1 + 0.08)^10) = $76.97

Therefore, one share of B&K common stock will be worth $76.97 ten years from now if the discount rate is 8%. The correct answer is (C).

B&K Enterprises Will Pay an Annual Dividend of $2