Question

Harry Corporation's common stock currently sells for $179.85 per share. Harry paid a dividend of $10.00 yesterday, and dividends are expected to grow at a constant rate of 6 percent forever. If the required rate of return is 12 percent, what will Harry Corporation's stock sell for one year from now, immediately after it pays its next dividend?

Select one:

a. $179.84

b. $187.27

c. $195.40

d. $190.64

Answer 1

Price of stock selling in one year is = (Dividend in year 2/(Required rate of return - Growth rate))

Dividend in year 2 is = (Dividend paid yestarday*(1+Growth rate)*(1+Growth rate))

Dividend in year 2 is = (10*(1+0.06)*(1+0.06))

Dividend in year 2 is = $ 11.2360/.

Price of stock selling in one year is = (11.2360/(0.12-0.06))

Price of stock selling in one year is = $ 187.27/.

Option b) is answer