Question

Pipen Industries' stock currently sells for $35.5 per share. The companies dividend per share is expected to grow at a constant rate of 5.5 percent annually. The required rate of return on the stock, r_s, is 9 percent. What is the stock's expected price 3 years from today?

Answer 1

Current stock price (P0) = $ 35.5/share

Growth rate (g) = 5.5% annually

Required return (Re) = 9%

Dividend for next year (D1) = P0 (Re - g)

= $ 35.5 (0.09-0.055) = $ 1.2425

Dividend at the end of 3 years (D3) = D1 * (1+g) * (1+g)

= $ 1.2425 (1+0.055) (1+1.055)

= $ 1.3829

To calculate the price 3 years from now, we need to calculate the 4th year dividend

Dividend at the end of 4 years (D4) = D3 * (1+g)

   = $ 1.3829 (1+0.055)

   = $ 1.4590

Therefore, stock price 3 years from now (P3) = D4 / (Re-g)

= $ 1.4590 (0.09-0.055)

= $ 41.6857