Question

The stock is expected to pay a dividend of $1.25 at the end of the year. The required rate of return is RS = 11%, and the expected constant growth rate is G = 5%. What is the Stocks one year from today?

Answer 1

Expected Dividend D₁ = $ 1.25

Growth rate, G = 5 %

RS = Required Rate of Return = 11 %

Price of stock today, P₀ = D₁ /(r_s – g) = $ 1.25 /(11 % - 5 %)

                            = $ 1.25/(0.11 – 0.05)

                           = $ 1.25/0.06 = $ 20.83

Price of stock next year, P₁ = P₀ (1+G) = $ 20.83 x (1 + 5 %)

                    = $ 20.83 x 1.05 = $ 21.875 or $ 21.88

The Stock price one year from today is $ 21.88.