The stock of MTY Golf World currently sells for $90 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now? a. $ 90.00.
b. $ 93.52.
c. $ 95.40.
d. $ 99.80.
e. $112.78.

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.

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