ABC tutoring Consultants stock doesn\'t now pay dividends. Investors expect that

Question

ABC tutoring Consultants stock doesn't now pay dividends. Investors expect that it will begin paying a dividend of $2/share in exactly 5 years at time 5. That is, they forecast that D5 will be $2/share. Investors expect that the dividend will then remain at that level of $2/share forever after that. They require a return of 18% on this tock. What is the value of this stock today based on the discounted model?

A $4.86 B $9.42 C $11.11 D $6.76 E $5.73

Please show me the solution steps by steps with formula. thank you so much..

Explanation / Answer

ABC Tutoring Consultants All Amounts in $ To work out the value of the stock today, based on the available information, we first need to calculate the present value of the dividend at the end of year 5 Based on the information that the dividend is $ 2 and the rate of return is 18%, the present value works out to $ 7.83 Deducting this from the return of $ 18 (Assuming 18% of $ 100), the price of the stock comes to $ 10.17. Since $ 11.11 is the closest to this amount, hence that is considered to be the correct solution.

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