Question

Berkeley, Inc. just paid an annual dividend of $2.60 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require an 11 percent return on this stock, what will the price be in 12 years?
66.46

67.84

69.16

70.89

74.08

Answer 1

Answer:

Option (D) is correct.

Explanation:

Dividend in year 12:

$= D0\times(1 + g)^{n}$

$= 2.60\times(1 + 0.045)^{12}$

      = $2.60 × 1.695881

      = $4.409292

Price of the stock in 12 years:

$P_{12}=\frac{D_{12}\times(1+g) }{r_{e}-g }$

$P_{12}=\frac{4.409292\times(1+0.045) }{0.11-0.045 }$

$P_{12}=\frac{4.60771}{0.065}$

                 = $70.89