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Manny Delgado’s company is now listed on the Nasdaq. The stock has a current price of...

Manny Delgado’s company is now listed on the Nasdaq. The stock has a current price of $50 per share (assume this is the “true” value). The company just paid a dividend of $3 per share yesterday. The dividends are expected to grow at a permanent growth rate of 4% per year. Calculate the following: (1) the annual required rate of return of this stock, and (2) the expected stock price one year from today.

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Answer #1

Current Price = $50.00
Current Dividend = $3.00
Growth Rate = 4.00%

Expected Dividend in 1 year = Current Dividend * (1 + Growth Rate)
Expected Dividend in 1 year = $3.00 * 1.04
Expected Dividend in 1 year = $3.12

Required Return = Expected Dividend in 1 year / Current Price + Growth Rate
Required Return = $3.12 / $50.00 + 0.04
Required Return = 0.0624 + 0.0400
Required Return = 0.1024 or 10.24%

Expected Price in 1 year = Current Price * (1 + Growth Rate)
Expected Price in 1 year = $50.00 * 1.04
Expected Price in 1 year = $52.00

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