Question

Sorenson Corp.’s expected year-end dividend is D1 = $4.00, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson’s expected stock price in 7 years, i.e., what is Pˆ 7?

Answer 1

$93.80

Explanation:

Data provided :

Year end dividend, D1 = $4.00

Required return, rs = 11% = 0.11

Dividend yield = 6% = 0.06

now,

Growth rate, g = Required return - Dividend yield

= 11% - 6%

= 5% = 0.05

Thus,

Sorenson’s expected stock price in 7 years =
`(D1(1+g)^n)/(rs-g)`

here,

n is the number of years i.e 7

therefore,

Sorenson’s expected stock price in 7 years =
`(\$4.00*(1+0.05)^7)/(0.11-0.05)`

or

Sorenson’s expected stock price in 7 years = $93.80