Question

If 1) the expected return for XYZ stock is 9.5 percent; 2) the dividend is expected to be $4.38 in one year, $4.62 in two years, $0 in three years, and $2.54 in four years; and 3) after the dividend is paid in four years, the dividend is expected to begin growing by 4.5 percent a year forever, then what is the current price of one share of the stock?

Answer 1

- Expected Dividend in Year 1(D1) = $4.38

- Expected Dividend in Year 2(D2) = $4.62

- Expected Dividend in Year 3(D3) = $0

- Expected Dividend in Year 4(D4) = $2.54

After year 4, dividend will grow at constant rate(g) = 4.5% per year forever

Expected return(Ke) = 9.5%

Calculating the Current Price of Stock:-

P0 = $4 + $3.853 + $0 + $1.767 + $36.925

P0 = $46.55

So, the current price of one share of the stock is $46.55

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