The CFO of ChemGen Ltd., a publicly traded chemical manufacturer, is in the process of evaluating the company’s dividend policy in relation to shareho... Accounting MCQs | Accounting MCQs

The CFO of ChemGen Ltd., a publicly traded chemical manufacturer, is in the process of evaluating the company’s dividend policy in relation to shareholder value. ChemGen’s dividend per share has been held constant at $2.30 for the last 10 years. The CFO would like to implement a 5% yearly dividend growth policy at ChemGen starting next year. The CFO has determined that the required return in the market for ChemGen stock is 13%.
What is the forecasted value of ChemGen stock in 5 years if the CFO’s dividend growth policy is implemented?

$38.53
$36.69
$30.19
$23.71Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (A) is correct. The dividend discount model (also known as the dividend growth model) is a method of arriving at the value of a stock by using expected dividends per share and discounting them back to present value. The next dividend is calculated as $3.08 [$2.30 dividend × (1 + .05 growth rate)6]. Thus, the forecasted value of one share of stock in 5 years is calculated as $38.53 [$3.08 next dividend ÷ (13% cost of capital – 5% dividend growth rate)].