Question

XYZ Company’s current stock price is $36, its last dividend was $2, and its required rate of return is 10%. If dividends are expected to grow at a constant rate, g, in the future, what is XYZ Company’s expected stock price 4 years from now?

Answer 1

1]	Per the constant dividend growth formula, the price
	of a stock = D0*(1+g)/(r-g), where
	D0 = Last dividend
	g = Growth rate in dividends
	r = Required rate of return
	Substituting available values in the above formula:
	36 = 2*(1+g)/(0.10-g)
	Solving for g:
	3.6-36*g = 2+2g
	1.6 = 38*g
	g = 1.6/38 =	4.21%
2]	Price at t4 = D5/(r-g) = 2*1.0421^5/(0.10-0.0421) =	$            42.45