A company’s dividend grows at a constant rate of 4 percent p.a.. Last week it paid...

A company’s dividend grows at a constant rate of 4 percent p.a.. Last week it paid a dividend of $6.83. If the required rate of return is 15 percent p.a., what is the price of the share 4 years from now? (round to nearest cent)

Select one:

a. $75.54

b. $72.64

c. $43.19

d. $112.94

Solutions

Expert Solution

Dividend growth rate: 4% p.a.

Last dividend: $6.83 and the required rate of return : 15% p.a.

Hence, Dividend after 4 year: Last dividend * ( 1 + growth rate)^Years

Dividend after 4 year: $ 6.83 * ( 1 + 0.04)⁴

Dividend after 4 year: $ 7.99

Price of the share 4 years from now will be as follow:

Price of share after 4 years: Dividend after 4 years *(1+ Growth rate) / (Required return - Growth rate)

Price of share after 4 years: 7.99 *(1+ 0.04) / (0.15 - 0.04)

Price of share after 4 years: 8.31 / 0.11

Price of share after 4 years: $ 75.54

Hence correct option is option "a. $75.54"

jeff jeffy answered 1 year ago

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