Question

A stock pays dividends of $1.00 at t = 1 (**t = 1 NOT t =
0**). Dividends are expected to grow at a
constant rate of 16% into the future. With a discount rate
**of**26%, **what should the price of the stock
be at t = 1**? (**price needed for t =1
NOT t = 0**) (hint: there is more than one way to do this
problem)

$11.20 |
||

$11.40 |
||

$11.60 |
||

$11.80 |
||

$12.00 |

Answer #1

Calculation of price of stock at the end=1 :

Dividend(D1)= $1

Growth= 16%

Discount rate= 26%

Current price = D1/(discount rate-growth)

=1/(0.26-0.16)

=1/0.10= $10

Price when t is 1= current price*(1+growth)= 10*(1+0.16)=10*1.16= $11.60

So correct answer is $11.60

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