Question

Amador Corporation has a stock price of $24 a share. The stock's year-end dividend is expected to be $2 a share. The stock's required rate of return is 12 percent and the stock's dividend is expected to grow at the same constant rate forever. What is the expected price of the stock six years from now

Answer 1

The answer is = $29.67

Step-by-step explanation:

Dividend Discount Model will be used and the formula is:

Ke = D1/Po + g

Where Ke is the cost of equity

D1 is the next year dividend

Po is the current share price

g is the growth rate.

Let's find the growth rate first.

g = Ke - D1/Po

= 0.12 - 2/24

0.12 - 0.083

=0.036 or 3.6%

So expected price of the stock in six year's time(future value) is

24 x 1.036^6

=$29.67