Question

Saks is expected to pay a dividend in year 1 of $1.80, a dividend in year 2 of $2.12, and a dividend in year 3 of $2.69. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%."

What should the stock price be worth after three years?

Answer 1

$96.84

Step-by-step explanation:

The computation of the stock price after three years are shown below:

= (Third-year dividend × growth rate) ÷ (Required rate of return - growth rate)

= ($2.69 × 1.08) ÷ (11% - 8%)

= ($2.9052) ÷ (3%)

= $96.84

The growth rate equal to

= 1 + growth rate

= 1 + 8%

= 1.08

We simply apply the growth model so that the after three years stock price can be correctly computed