Question

FinanceIsFun just paid a dividend of $1.60 on each share of its stock. The company expects...

FinanceIsFun just paid a dividend of $1.60 on each share of its stock. The company expects that the dividends will increase at a constant rate of 6 percent per year in perpetuity. Investors require a 10 percent return on this company's stock.

  

Calculate the current stock price. (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
  Current price $   
Calculate the stock price in three years. (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
  Stock price $   
Calculate the stock price in 12 years. (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
  Stock price $   

Homework Answers

Answer #1

a)

Current stock price = D1 / required rate - growth rate

Current stock price = (1.6 * 1.06) / 0.1 - 0.06

Current stock price = 1.696 / 0.04

Current stock price = $42.40

b)

Stock price in 3 years = Present value (1 + r)n

Stock price in 3 years = 42.4 (1 + 0.06)3

Stock price in 3 years = 42.4 * 1.191016

Stock price in 3 years = $50.50

c)

Stock price in 12 years = Present value (1 + r)n

Stock price in 12 years = 42.4 (1 + 0.06)12

Stock price in 12 years = 42.4 * 2.012196

Stock price in 12 years = $85.32

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