Question

Benning common stock recently paid a $4.00 dividend. The dividend growth rate over the past 10...

Benning common stock recently paid a $4.00 dividend. The dividend growth rate over the past 10 years has been 5.00%. The market required rate of return over the past five years has been 11.00% and continues to be the required rate of return.

What was the price of Benning stock 3 years ago?

What is the expected price from 5 years from today, assuming the dividend growth remains constant?

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Answer #1

price three years ago = dividend two years ago / (required rate - growth rate)

dividend two years ago = recent dividend / (1+ growth rate)^2

=>4 / (1.05)^2

=>3.62811791.

price three years ago = 3.62811791 / (0.11-0.05)

=>$60.47.

second part:

price 5 years from today:

first let us know the price today => dividend just paid *(1+ growth rate) / (required return - growth rate)

=>$4 *(1.05) / (0.11-0.05)

=>$70.

expected price 5 years from today = current price *(1+ growth rate)^5

=>$70*(1.05)^5

=>$89.34.

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