Question

what would be the expected price of a stock when dividends are expected to grow at a 25 percent rate for two years, and then grow at a constant rate of 5 percent, if the stock's required return is 13 percent and next year's dividend will be $4.00?

Answer 1

To calculate the expected price of a stock with changing dividends, we can use the Gordon Growth Model.

Step-by-step explanation:

In order to calculate the expected price of the stock, we need to use the Gordon Growth Model, which is a formula used to value a stock. The formula is:

P = D / (r - g)

Where P is the expected price, D is the dividend, r is the required return, and g is the growth rate.

For the first two years, the growth rate is 25% and the dividend is $4.00. After that, the growth rate is 5%. The required return is 13%.

Using these values, we can calculate the expected price:

P = $4.00 / (0.13 - 0.25) + $4.00 / (0.13 - 0.05) * (1 + 0.05)

Simplifying the equation:

P = $4.00 / (-0.12) + $4.00 / (0.08) * (1.05)

P = -$33.33 + $50 * 1.05

P = $16.67 + $52.50

P ≈ $69.17