Question

Mariota Corp. just paid a dividend of $3.55 per share on its stock. The dividend growth rate is expected to be 3.95 forever and investors require a return of 12.1 percent on this stock. What will the stock price be in 13 years?

Answer 1

Answer: $74.92

Explanation:

The following can be deduced form the question:

Dividend, Do = $3.55

g = growth rate

Re = return

Dividend at 13th year = 3.55(1+g)^13

= 3.55(1+3.95%)^13

= 3.55(1.0395)^13

= 5.874

The stock price in the 13th year will be:

= (D13 × (1+g)/(Re - g)

= (5.874 × 1.0395)/(0.121 - 0.0395)

= $74.92