Question

AKaA's stock projects the following dividends:

Year 1 = $2.22

Year 2 = $3.22

Year 3 = $3.33

Year 4 = $4.01

Year 5 = $5.50

An Analyst at Goldman Sachs projects the future price of the stock will likely be $75 at the end of 5 years. Assuming an opportunity cost of capital of 15%, at what price would you expect the stock to sell today (rounded to the nearest dollar)?

Answer 1

Given about AkaA's stock,

Projected annual dividends are

D1 = $2.22

D2 = $3.22

D3 = $3.33

D4 = $4.01

D5 = $5.5

future price of stock at year 5 is $75

=> P5 = $75

cost of capital Ke = 15%

So, stock price today is sum of PV of future dividends and stock price at year 5

=> P0 = D1/(1+Ke) + D2/(1+Ke)^2 + D3/(1+Ke)^3 + D4/(1+Ke)^4 + D5/(1+Ke)^5 + P5/(1+Ke)^5

=> P0 = 2.22/1.15 + 3.22/1.15^2 + 3.33/1.15^3 + 4.01/1.15^4 + 5.5/1.15^5 + 75/1.15^5 = $48.87

The stock will sell at around $48.87 today