Question

Company ABC currently pays $3.5 dividend. dividends have been growing at a 4% annual rate and are expected to continue growing with the same rate in the future. John buys a share of this company's stock and holds it for one year and sells it for $23. what is the current value of the stock to John is the required rate of return is 15%?

Group of answer choices

23.17

21.67

20.15

25.5

Answer 1

What is the current value of the stock to John?

Answer:    23.17

Working

We are asked to find out the current value of the stock, for calculating the same we can use the following formula

Where,

D1 = Dividend in next year. (See note1)

P1 = Price of stock after one year = $23 (provided in the problem)

Re = required rate of return = 15% (provided in the problem)

Note1

Since in the problem we are provided with current year Dividend we need to calculate next year dividend, for that we can use the following formula

D1       = Current dividend * (1+Dividend growth rate)

            = $3.5 * (1+ 0.04)

            = $3.64