Question

1. Sky High Co. just paid a dividend of $2.0 per share on its stock. The dividends are expected to grow at a constant rate of 2 percent per year indefinitely. If investors require an 8.6 percent return on Sky High Co. stock, the current price is $ _________ . Round it to two decimal places

2. Sky High Co. just paid a dividend of $4.6 per share on its stock (D₀). The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. If investors require an 9.1 percent return on Sky High Co. stock, the stock price in 3 years should be $ _________ . Round it to two decimal places

Answer 1

1)

Next year dividend = 2 (1 + 2%) = 2.04

Current price = Next year dividend / required rate - growth rate

Current price = 2.04 / 0.086 - 0.02

Current price = 2.04 / 0.066

Current price = $30.91

2)

Next year dividend = 4.6 (1 + 6%) = 4.876

Current price = Next year dividend / required rate - growth rate

Current price = 4.876 / 0.091 - 0.06

Current price = 4.876 / 0.031

Current price = 157.290323

Price in 3 years = Present value (1 + r)^n

Price in 3 years = 157.290323 (1 + 0.06)^3

Price in 3 years = 157.290323 * 1.191016

Price in 3 years = $187.34