Answer:
The correct option is c. $95.40.
Explanation:
To calculate, we have to first calculate the dividend payable 2 years from now as follows:
g = constant dividend growth rate = 6%, or 0.06
D0 = Dividend just paid = $5.09
D1 = Dividend payable 1 year from now = D0 * (1 + g) = $5.09 * (1 + 0.06) = $5.40
D2 = Dividend payable 2 years from now = D1 * (1 + g) = $5.40 * (1 + 0.06) = $5.724
The price at which the stock will sell one year from now can now be calculated as follows:
P = D2 / (r - g) ................... (1)
Where;
P = The price at which the stock will sell one year from now = ?
D2 = Dividend payable 2 years from now = $5.724
r = required rate of return = 12%
g = constant dividend growth rate = 6%
Substituting the values into equation (1), we have:
P = $5.724 / (12% - 6%)
P = $5.724 / 6%
P = $95.40
Therefore, the correct option is c. $95.40.
