Question

stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% 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

The stock price 5 years from now will be 44.46

Step-by-step explanation:

The stock price will increase like compound interest at the same rate as the dividends.

`Stock(1+ g)^(time) = Amount`

Stock 35.25

time 5

dividend grow rate 0.0475

`35.25 (1+ 0.0475)^(5) = Amount`

Amount 44.45588696

The stock price 5 years from now will be 44.46

Reasoning:

In five years, if we calcualte the gordon dividend growth model:

`(divends_(year5))/(return-growth) = Intrinsic \: Value`

and year 5 dividends would be:

`Dividend\: (1+ g)^(5) = Divends_(year5)`

`(Dividend\: (1+ g)^(5))/(return-growth) = Intrinsic \: Value`

we can arrange the formula like this:

`(Dividend)/(return-growth) * (1+ g)^(5)= Intrinsic \: Value`

The first part is the current stock price so our formula is confirmed.

`$Market Value Today * (1+ g)^(5)= Intrinsic \: Value`