Question

In: Finance

A company recently paid an annual dividend of $.65 a share and plans to increase future dividends by three percent annually.

A company recently paid an annual dividend of $.65 a share and plans to increase future dividends by three percent annually. The discount rate is 12 percent. What will the value of this stock be four years from now?

  1. $9.52

  2. $7.61

  3. $6.93

  4. $8.37


Solutions

Expert Solution

First we will find the current value of the stock as shown below:

= Recent dividend (1 + growth rate) / (discount rate - growth rate)

= $ 0.65 (1 + 0.03) / (0.12 - 0.03)

= $ 0.6695 / 0.09

= $ 7.438888889

So, the price of the stock four years from now will be computed as follows:

= current price (1 + growth rate)4

= $ 7.438888889 x 1.034

= $ 8.37 Approximately

So, the correct answer is option D.

jeff jeffy answered 2 years ago
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