Question

Wilson's Furniture is experiencing good growth so has decided to commence paying dividends starting next year. The first dividend will be $0.50 a share with annual increases of 4 percent in the dividend amount. The discount rate is 10 percent. What will the value of this stock be four years from now?

Answer 1

The price of the stock four years from now $9.75

Step-by-step explanation:

The constant growth model of the DDM approach will be used to calculate the value of this stock as its dividends grow by a constant percentage. The formula for the constant growth model is,

P0 = D1 / r - g

To calculate the price of the stock today, we use the fividend for the next period i.e. D1.

So, to calculate the price of stock four years from now, we will use D5.

D5 = D1 * (1+g)^4

And D1 = 0.5

So, the price of the stock four years from now is:

P = 0.5 * (1+0.04)^4 / 0.1 - 0.04

P = $9.748 rounded off to $9.75