Question

A stock is expected to pay a dividend of $2.3 one year from now, and the same amount every year thereafter. The stock's required return (indefinitely) is expected to be 9.5%. The stock's predicted price exactly 5 years from now, P5, should be $_______________.

A stock is expected to pay a dividend of $1.2 one year from now, $1.6 two years from now, and $2.4 three years from now. The growth rate in dividends after that point is expected to be 8% annually. The required return on the stock is 14%. The estimated price per share of the stock six years from now should be $_________.

Answer 1

As per the Gordon growth model, the value of stock can be given as

Where D1 = Next year Dividend

V0 = Present Value

k = Stock's required return

g = Dividend Growth rate

Similarly if we want to find prices at the end of 5th year the equation will be

Now as the stock will continue to pay dividend of $2.3 the D6 will be $2.3 and as there is no growth in dividend g will be 0

= $ 24.2

Now for the second question as we want to calculate price of stock at the end of 6th year we need to have dividend for 7th year

k = 14%

g = 8%

D3 = $ 2.4

D7 = 2.4 * (1.08)4 = 3.265

Now Value of stock 6 years from now will be

V6 = $ 54.41