Question

#8) Waterway Natural Foods' current dividend is $10.00. You expect the growth rate to be 0 percent for years 1 to 5, and 2 percent for years 6 to infinity. The required rate of return on this firm’s equity is 10 percent.

A) Determine the expected dividend at the end of year 5.

= $10

B) Determine the expected dividend at the end of year 6.

= $10.20

C) Determine the expected price of the stock at the end of year 5 (immediately after the year 5 dividend).

= ???
D) Determine the price of the stock today.

= ???

** Please solve for C) and D) only.

Answer 1

  

_______________________________

_______________________________

Answer c)

Value of Stock after 5 years = D5 * (1+G) / Required Return - G

G = 0.02

Required Return = 0.10

= 10 * (1+0.02) / 0.10 - 0.02

= 127.5

Answer d)

Value today = Value of Stock after 5 years / (1+r)^n

r = 0.10

n = 5

= 127.50 / (1+010)^5

= 79.17

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