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 of26%, 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 |
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$11.40 |
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$11.60 |
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$11.80 |
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$12.00 |
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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