Question

A stock is expected to pay its first $1.5 dividend in 3 years from now ( t=3). The dividend is expected to be paid annually forever and grow by 0% pa. The discount rate is 6% pa. Estimate what the stock price wil be in 4.75 years from now. The stock price at time 4.75 is expected to be: Select one:

a. $24.6385
b. $25
c. $26.1168
d. $276838
e. $32.9718

Answer 1

To calculate the stock price, use the perpetuity formula: P = D / (r-g). Given the values, the stock price in 4.75 years is $25.

Step-by-step explanation:

To calculate the stock price, we need to find the present value of the expected future dividends. Since the dividend is expected to be paid annually forever and grow by 0% per year, we can use the perpetuity formula: P = D / (r-g), where P is the stock price, D is the expected dividend, r is the discount rate, and g is the growth rate.

Given that the expected dividend is $1.5 and the discount rate is 6%, we can calculate the stock price in 4.75 years using the perpetuity formula:

P = $1.5 / (0.06 - 0) = $25

Therefore, the stock price at time 4.75 is expected to be $25.