Question

What is the price of Yellow Sand Shipping stock expected to be in 5 years if its annual dividend is expected to grow by 4.31 percent per year forever, the next dividend is expected in 1 year, the dividend is expected to be 5.26 dollars in 5 years, and the expected return is 11.87 percent per year?

Answer 1

Formula to calculate the current share price by dividend discount model for constant dividend growth rate forever

Stock Price P0 = D0 * (1+g) / (k – g)

The above formula can be rewritten in following manner to calculate the price of Yellow Sand Shipping stock expected to be in 5 years

Stock Price P5 = D5 * (1+g) / (k – g)

Where:

P0 = the current stock price

P5 = stock price expected to be in 5 years =?

D0 = dividend paid this year =?

D5 = expected dividend after 5 years = $5.26

k = required rate of return = 11.87% per year

g = growth rate of dividends = 4.31%

Therefore,

Stock Price P5 = $5.26 * (1+4.31%) / (11.87% – 4.31%)

= $5.4867 / (0.1187 – 0.0431)

= $72.58

Therefore the price of Yellow Sand Shipping stock expected to be $72.58 in 5 years.