Martian Airways Inc. has a 12% required rate of return. It does not ex

Martian Airways Inc. has a 12% required rate of return. It does not expect to initiate dividends for 15 years, at which time it will pay $2.00 per share in dividends. At that time, Martian Airways expects its dividends to grow at 7% forever.

What is an estimate of Martian Airways’ price in 15 years (P15) if its dividend at the end of year 15 is $2.00?
A) $42.80
B) $33.40
C) $31.20
D) $30.00

ANSWER

Answer: A
Explanation: A) We use the formula: P15 = . Inserting our values, we get:
P15 = = = $42.80.