What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate for 3 years,then grow at a constant rate of 5%,if the stock's required return is 13% and next year's dividend will be $4.00?
A) $61.60
B) $62.08
C) $68.62
D) $79.44

Question

Quizplus · Accepted Answer

To calculate the expected price of a stock using the dividend growth model, we can use the following formula:

Price = (Next year's dividend / (Required rate of return - Dividend growth rate))

First, we need to calculate the dividends for the next three years using the 25% growth rate:

Year 1 dividend = $4.00
Year 2 dividend = $4.00 x (1 + 0.25) = $5.00
Year 3 dividend = $5.00 x (1 + 0.25) = $6.25

After year 3, the dividends will grow at a constant rate of 5%. Using the dividend growth model, we can calculate the expected price of the stock:

Price = ($6.25 x (1 + 0.05)) / (0.13 - 0.05) = $68.62

Therefore, the best choice is C.

What Would Be the Approximate Expected Price of a Stock