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Fowler, Inc., just paid a dividend of $2.55 per share on its stock. The dividends are expected to grow at a constant rate of 3.9 percent per year, indefinitely. If investors require a return of 10.4 percent on this stock, what is the current price? What will the price be in three years? In 15 years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Respuesta :

Parrain

Answer: a) $40.76

b) $45.72

c) $72.36

Explanation:

We shall use the dividend discount model of stock valuation to solve for this with the following formula,

P0 = D1 / (Ke - g)

Where,

P0 = Current Price

D1 = Expected Div AFTER 1 YEAR

Ke = Cost of Equity

g = Growth Rate

We have only the current dividend so we will apply the growth rate to find the next one.

a) Current Price

PO = D(1+g) / Ke - g

PO = 2.55(1+0.039) / 0.104 - 0.039

PO = $40.76

b) In 3 years. So we would need to use the dividend, 4 years from now to be able to calculate

P3 = D(1+g)^4 / Ke - g

P3 = 2.55(1+0.039) ^4 / 0.104 - 0.039

P3 = $45.72

c) In 15 years. So we would need to use the dividend, 16 years from now to be able to calculate,

P15 = D(1+g)^16 / Ke - g

P15 = 2.55(1+0.039) ^16 / 0.104 - 0.039

P15 = $72.36

If you need any and I mean any clarification, do comment. Cheers.

a) The current price should be  $40.76.

b) The price in three years should be $45.72.

c) The price in 15 years should be $72.36.

Calculation of the price:

Since

we know that

P0 = D1 / (Ke - g)

here,

P0 = Current Price

D1 = Expected Dividend

Ke = Cost of Equity

g = Growth Rate

SO,

a) Current Price

PO = D(1+g) / Ke - g

PO = 2.55(1+0.039) / 0.104 - 0.039

PO = $40.76

b)

Here we have to determine P3 i.e.

P3 = D(1+g)^4 / Ke - g

= 2.55(1+0.039) ^4 / 0.104 - 0.039

= $45.72

c)

Here we have to determine P15 i.e.

P15 = D(1+g)^16 / Ke - g

= 2.55(1+0.039) ^16 / 0.104 - 0.039

= $72.36

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