Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years.Yesterday,the firm announced the dividend will increase next year by 10 per cent and will stay at the level through year three,after which time the dividends will increase by 2 per cent annually.The required return on this stock is 12 per cent.What is the current value per share?

Question

Quizplus · Accepted Answer

The correct answer is A because the current value of the stock is $25.51. This is calculated by using the dividend discount model, which takes into account the expected future dividends and the required return on the stock. The expected future dividends are calculated by multiplying the current dividend by the expected growth rate. The required return is the rate of return that investors expect to earn on the stock. In this case, the expected growth rate is 10% for the next three years and 2% thereafter. The required return is 12%.

Atlas Home Supply Has Paid a Constant Annual Dividend of $2.40