Question

Anton, Inc., just paid a dividend of $2.90 per share on its stock. The dividends are expected to grow at a constant rate of 4.75 percent per year, indefinitely. Assume investors require a return of 9 percent on this stock.Requirement 1:What is the current price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)Requirement 2:What will the price be in six years and in thirteen years? (Do not round intermediate calculations.Round your answers to 2 decimal places (e.g., 32.16).)

Answer 1

1. Using the Gordon Growth model;

Price = Next dividend / (required return - growth rate)

= (Current dividend * (1 + Growth rate)) / (required return - growth rate)

= (2.90 * (1 + 4.75%)) / (9% - 4.75%)

= ‭3.03775‬‬/ 4.25%

= $71.48

2. Six years;

The stock will grow at a rate of 4.75% every year.

= 71.48 * (1 + growth rate)⁶

= 71.48 * 1.0475⁶

= $94.43

13 years;

= 71.48 * 1.0475¹³

= $130.67