Question

The current price of a stock is $102.00. If dividends are expected to be $10 per share for the next 5 years, and the required return is 12%, then what should price of the stock be in 5 years when you plan to sell it? If the dividend and required return is expected to increase by $5 five years from now, does the current stock price also increase by $5? Why or why not?

Answer 1

Let the Terminal value at year 5 be "X"

Current price = [PVA 12%,5*Annual dividend ] +[PVF 12%,5*Terminal value ]

102 =[3.60478*10] + [.56743*TV]

102 = 36.04776 + .56743 TV

102 -36.04776 = .56743 TV

   TV = 65.95224/.56743

        = $ 116.23 per share

Price at end of year 5 = $ 116.23

The statement is False .Because increase in required return will decrease the price of stock (more than the increase in dividend ).so the stock price will not increase by $ 5 .

**find present value annuity factor and present value factor from there table respectively.