Question

A stock is expected to pay a $0.45 dividend at the end of the year (D1 = 0.45). The dividend is expected to grow at a constant rate of 4% a year, and the stock's required rate of return is 11%. What is the expected price of the stock 10 years from today?

a. $12.65
b. $ 9.15
c. $18.25
d. $ 9.52
e. $ 6.02

Answer 1

d. $ 9.52

Step-by-step explanation:

The computation of the expected price of the stock 10 years from today is shown below:

= Dividend at year 10 ÷ (Required rate of return - growth rate)

where,

Dividend at year 10 is

= $0.45 × (1 + 0.04)^10

= $0.67

So, the expected price is

= $0.67 ÷ (11% - 4%)

= $9.52

By applying the formula we can easily find out the expected price of the stock