Question

Longan Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. Last week, the company paid a dividend of $2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of Longan’s common stock be worth ten years from now if the applicable discount rate is 8%?

Answer 1

The price of the stock 10 years from now will be $38.45

Step-by-step explanation:

The constant growth rate in the company's stock is,

growth rate = (2.08 - 2) / 2 = 0.04 or 4%

To calculate the price today, we use the expected dividend for the next year that is D1. To calculate the price of the share 10 years from now, we will use the D11 that is expected dividend in the 11th year from now.

D11 = D0 * (1+g)^11

D11 = 2 * (1+0.04)^11 = $3.0789

The price of the stock 10 years from now will be,

P = D11 / r - g

P = 2 * (1+0.04)^11 / 0.08 - 0.04

P = $38.446 rounded off to $38.45