McClure Mining Company (MMC) is expected to pay a $2.08 dividend one year from today. (In addition, yesterday, they paid a dividend of $2.00.) If MMC continues to grow its dividend by a constant rate each year, forever, at what price will the company's stock sell ten years from today (just before the time 10 dividend)? Assume the stockholder required return is 8 percent.
Given about McClure Mining Company,
Expected dividend next year D1 = $2.08
Last dividend D0 = $2
So, dividend growth rate g = (D1-D0)/D0 = (2.08 - 2)/2 = 4%
stockholder required return rs = 8%
So, Price of the stock 10 year from today just after the year 10 dividend is paid is
P10 = D10*(1+g)/(rs-g)
where D10 = D0*(1+g)^10 = 2*1.04^10 = $2.96
So, P10 = 2.96*1.04/(0.08-0.04) = $76.97
Price just after year 10 dividend is paid is $76.97
So, price just before year 10 dividend is paid = P10 + D10 = 76.97 + 2.96 = $79.93
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