Martian Airways Inc.has a 12% required rate of return.It does not expect to initiate dividends for 15 years,at which time it will pay $2.00 per share in dividends.At that time,Martian Airways expects its dividends to grow at 7% forever.What is an estimate of Martian Airways' price in 15 years (P15)if its dividend at the end of year 15 is $2.00?
A)$42.80
B)$33.40
C)$31.20
D)$30.00

Question

Quizplus · Accepted Answer

The price in 15 years (P15) can be calculated using the Gordon Growth Model: P15 = D16 / (r - g) = $2.00 * (1 + 0.07) / (0.12 - 0.07) = $42.80.