Question

In: Finance

A stock paying $5 in annual dividends sells now for $80 and has an expected return...

A stock paying $5 in annual dividends sells now for $80 and has an expected return of 10%. What would be the stock price eight years from now?

a. 108.46

b. 83.00

c. 126.91

d. 114.31

Expert Solution

First, let's find the growth rate of dividends

Price today = D1/(r - g)

g = r - D1/Price today

g = 0.10 - 5/80

g = 0.0375

D9 = D1 * (1 + g)^8

D9 = 5 * (1 + 0.0375)^8

D9 = $6.7123539214

Price in eight years, P8 = D9/(r - g)

P8 = 6.7123539214/(0.10 - 0.0375)

P8 = 6.7123539214/0.0625

P8 = 107.3976627424

Option a is closest: 108.46

(Please ignore rounding errors)

jeff jeffy answered 2 years ago

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