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

Solutions

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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