Question

A stock has a current annual dividend of $6.00 per year and it is expected to grow by 3% (0.03) a year. It is expected that two years from now the stock will sell for $90.00 a share. If the interest rate is 5% (0.05), the dividend-discount model predicts the stock's current price should be:
A) $94.90B) $93.29C) $101.30D) $94.30

Answer 1

Answer:

B) $93.29

Explanation:

Future value of stock   $90

PV Factor               1/(1.03)^2

Present value of stock  90/1.03^2=$81.63

Present value of dividends =6+6/1.03=11.82

Total of present value of stock and dividend=$81.63+$11.62=$93.29