Question

Sweet & Co. just announced it is increasing its annual dividend to $3 next year and establishing a policy whereby the dividend will increase by 3 percent annually thereafter. How much will one share of this stock be worth 8 years from now if the required rate of return is 9.5 percent?

a) $56.14
b) $57.97
c) $58.47
d) $59.22

Answer 1

To calculate the value of one share of Sweet & Co. stock 8 years from now, use the formula for a growing perpetuity to determine the future dividend and discount it back to the present value.

Step-by-step explanation:

To calculate the value of one share of Sweet & Co. stock 8 years from now, we need to determine the future dividends and discount them back to the present value. The dividend is expected to increase by 3% annually, starting from $3 next year. Using the formula for a growing perpetuity, the future dividend in year 8 would be $3*(1+0.03)^8. We can then discount this future dividend back to the present value using the required rate of return of 9.5%. The calculation would be: $3*(1+0.03)^8 / (0.095 - 0.03). The result is approximately $59.22, so the correct answer is d) $59.22.