Answer:
The answer is option c). The stock price is expected to be $54 a share one year from now
a). The annual dividend payment=$3 per share
b). Dividend yield==6%
c). The expected stock price is $57 after 1 year
Explanation:
a). Calculate the expected dividend payment
Using the expression for calculating the required rate of return, we can calculate the expected dividend payment as follows:
RRR=(EDP/SP)+DGW
where;
RRR=required rate of return
EDP=expected dividend payment
SP=share price
DGW=dividend growth rate
In our case:
RRR=14%=14/100=0.14
EDP=unknown=d
SP=$50 a share
DGW=8%=8/100=0.08
replacing in the original expression;
0.14=(d/50)+0.08
0.14-0.08=(d/50)
d/50=0.06
d=0.06×50
d=3
The annual dividend payment=$3 per share
b). Calculate the dividend yield
The dividend yield is expressed using the formula below;
Dividend yield=Annual dividend/share price
where;
Annual dividend=$3
share price=$50 a share
replacing;
Dividend yield=3/50=0.06=6%
c). Future price of stock after one year
Future price=Current price(1+dividend growth rate)^n
where;
Current price=$50
dividend growth rate=8%=8/100=0.08
n=1 year
replacing;
Future price=50×(1+0.08)^1=54
Future price=$54
The expected stock price is $54 after 1 year
