Question

The Herjavec Co. just paid a dividend of $1.35 per share on its stock. The dividends are expected to grow at a constant rate of 3 percent per year indefinitely. Investors require a return of 10 percent on the company's stock.

What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Current price           $  

What will the stock price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Stock price           $  

What will the stock price be in fifteen years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Stock price           $

Answer 1

As per DDM

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

Price = 1.35 * (1+0.03) / (0.1 - 0.03)

Price = 19.86

Dividend yield = dividend in 1 year/current stock price

= recent dividend* (1 + growth rate )/price = 1.35*(1+0.03)/19.86=7%

Capital gains yield = required rate-dividend yield

= 10-7 = 3%

Stock price in 3 years= (1+capital gains yield)^3

= 19.86*(1+0.03)^3=21.7

Stock price in 15 = (1+capital gains yield)^15

= 19.86*(1+0.03)^15=30.94