If the required return for a stock is 14% annually, what should the stock price be one year from today assuming the current price is $24.00 and a dividend of $0.24 is paid sometime over the year?
A)$27.36
B)$27.12
C)$21.05
D)$20.81

Question

Quizplus · Accepted Answer

Dividend for the year = $0.24
Required return = 14%
Dividend is paid sometime during the year, so we cannot use the dividend discount model directly. We can use the constant growth model, given as:
P = D / (r - g)

where P is the stock price, D is the expected dividend, r is the required return, and g is the expected growth rate.

We can estimate the expected growth rate using past growth rates or analyst estimates. Assuming a constant growth rate of 3%, we get:
P = $0.24 / (0.14 - 0.03)
P = $2.80

The stock price in one year should be the sum of the current price and the expected dividend and growth:
P = $24.00 + $2.80
P = $27.12

So the best choice is B.

If the Required Return for a Stock Is 14% Annually