Question

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 9.50% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Answer 1

Assuming that current time is at the end of Year 0, let the expected dividend next year be denoted by D1

Current Stock Price = P0 = $ 35.25, Dividend Growth Rate = g = 9.5 % per annum and Required Rate of Return = ke = 11.5 %

Therefore, ke = (D1/P0) + g

0.115 = (D1/35.25) + 0.095

D1 = (0.115 - .095) x 35.25 = $ 0.705

Assuming that the dividend growth rate is constant in perpetuity, dividend at the end of Year 6 = D6 = 0.705 x (1.095)^(5) = $ 1.1098

Let the expected stock price at the end of Year 5 be denoted by P5

Therefore, ke = (D6/P5) + g

P5 = 1.1098 / (0.115 - 0.095) = $ 55.49