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

Question

Business

Kennedi Grimes

30 March, 10:48

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

+1

Answers (1)

Know the Answer?

Callie Sullivan · Answer 1

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