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A stock has an annual dividend of $10.00 and it is expected not to grow. It is believed the stock will sell for $100 one year from now, and an investor has a discount (interest) rate of 6% (0.06). The
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A stock has an annual dividend of $10.00 and it is expected not to grow. It is believed the stock will sell for $100 one year from now, and an investor has a discount (interest) rate of 6% (0.06). The dividend discount model predicts the stock's current price should be:

A. $94.67
B. $116.00
C. $103.77
D. $106.60

User Fihop
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1 Answer

17 votes
17 votes

Answer: C

Explanation: The present value of a stock is the sum of all future cash flows discounted using a rate.

The future cash flows, in this case, is the proceeds from selling the stock ($100) and the dividend ($10).

We can calculate the current price of the stock using the formula:

($100 + $10) / (1 + 6%) = 103.77

User Stan Riley
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