Question

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.

a) $83.25

b) $84.05

c) $76.97

d) $72.01

$78.93

Answer 1

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

there must be misprinting in options as calculation and concept shown above are correct.