Crosby Inc.has an 11% required rate of return.It does not expect to initiate dividends for 20 years,at which time it will pay $4.00 per share in dividends.At that time,Crosby expects its dividends to grow at 6% forever.What is an estimate of Crosby's price in 20 years (P20)if its dividend at the end of year 20 is $4.00?
A)$34.80
B)$55.00
C)$57.50
D)$84.80

Question

Quizplus · Accepted Answer

Using the dividend discount model:
P20 = (D21 / (r - g))
Where D21 is the dividend in year 21 (since Crosby is not paying dividends for the first 20 years), r is the required rate of return, and g is the growth rate of dividends after year 20.
D21 = D20 * (1 + g) = $4.00 * (1 + 0.06) = $4.24
P20 = ($4.24 / (0.11 - 0.06)) = $84.80
Therefore, the estimate of Crosby's price in 20 years (P20) is $84.80.