Question

Washington Industries’ stock currently sells for $60 a share. It just paid a dividend of $2.64 a share (that is, D 0 = $2.64). The dividend is expected to grow at a constant rate of 6.9 percent a year. What stock price is expected 1 year from now?

a. $56.13
b. $68.63
c. $66.96
d. $60.00
e. $64.14

Answer 1

To find the expected stock price of Washington Industries one year from now, use the formula P0 *(1+g), where P0 is the current stock price and g is the growth rate. The expected price, with P0 = $60 and g = 6.9%, is $64.14. The correct option is e. $64.14

Step-by-step explanation:

The question deals with the expected stock price one year from now, given a current price, a recent dividend, and a constant growth rate.

To find this, we can use the Gordon Growth Model (also known as the Dividend Discount Model) which calculates the value of a stock based on its dividends that grow at a constant rate.

Specifically, the formula to find the expected stock price one year from now (P1) is P0 *(1+g), where P0 is the current stock price and g is the growth rate.

Using the given figures: P0 = $60, D0 = $2.64, and g = 6.9%, the expected stock price one year from now would be calculated as follows:

P1 = $60 * (1 + 0.069) = $60 * 1.069 = $64.14.

Therefore, the expected stock price of Washington Industries one year from now is $64.14. The correct option is e. $64.14