A stock pays dividends of 100 at t 1 t 1 NOT t 0 Dividend

A stock pays dividends of $1.00 at t = 1 (t = 1 NOT t = 0).   Dividends are expected to grow at a constant rate of 16% into the future. With a discount rate of26%, what should the price of the stock be at t = 1?   (price needed for t =1 NOT t = 0) (hint: there is more than one way to do this problem)

$11.20

$11.40

$11.60

$11.80

$12.00

Solution

Calculation of price of stock at the end=1 :

Dividend(D1)= $1

Growth= 16%

Discount rate= 26%

Current price = D1/(discount rate-growth)

                    =1/(0.26-0.16)

                    =1/0.10= $10

Price when t is 1= current price*(1+growth)= 10*(1+0.16)=10*1.16= $11.60

So correct answer is $11.60