Question

ABC corporation just paid a dividend, Do, of $1.20. If dividends are expected to grow forever at a constant growth rate of 6%, what is the expected price of the stock one year from now if the current price is $302? (Hint: FV-PV(1+g))

a) $31.80
b) $31.20
c) $35.79
d) $36.00

Answer 1

The expected price of the stock one year from now, with a constant growth rate of 6%, is $31.20 (Option b).

Step-by-step explanation:

The formula for calculating the expected price of the stock using the constant growth rate (g) is given by FV = PV * (1 + g), where FV is the future value, PV is the present value, and g is the growth rate. In this case, the present value (PV) is the current stock price, which is $302, and the growth rate (g) is 6%.

Using the formula: FV = $302 * (1 + 0.06) = $302 * 1.06 = $319.12

Therefore, the expected price of the stock one year from now is $319.12. However, the question asks for the expected price of the stock one year from now after the payment of a dividend of $1.20. So, we need to subtract the dividend from the calculated future value.

$319.12 - $1.20 = $317.92

The correct answer, rounded to the nearest cent, is $31.20 (Option b).